Article referenced in VideoCast above:

“Healthy Strides” Stock Market (and Sentiment Results)…

Key Takeaways – Episode 368

A detailed summary of this week’s videocast with Tom Hayes, covering the portfolio walkthrough, stock ideas, positioning, and market sentiment.

Executive summary

Tom framed the week around the earnings rotation he has been describing since the summer. Q3 earnings growth is running ~30%, but the leadership has flipped: the S&P 493 grew earnings 32.6% against 22.6% for the Mag 7, one quarter earlier than he expected and the first time since 2022. October reflected it, with consumer staples up 10.9%, value up ~5%, and growth down 5.5%, while the Nasdaq fell ~9% and the S&P excluding AI rose ~5%. Tom ties the move to the AI cost centers, where cumulative free cash flow turned negative and capital raising is heavy, against the AI beneficiaries, where earnings are growing.

On the election, Tom calls a Democratic House pretty much a foregone conclusion with the Senate a tossup. He expects gridlock to help bonds, with the 10-year yield down from 5.30% to well below 5%. He cautioned against leaning on the post-midterm record: markets rose in 19 of 19 periods through June 30 for an average of 15.7%, but 2002–03 and 2018–19 each saw interim drawdowns of 14.7% and 16.8%. This year has not had the usual pre-election index correction, so Tom, as a betting man, leans toward an interim drawdown in the AI-led index names while the 493 keep working underneath.

“We are no longer in a zero interest rate policy, and that old dog won’t hunt.”

Tom Hayes, on valuations without zero rates

The weekly articles covered VF Corp and Baxter, with a Henry Schein read-through for Dentsply Sirona ahead of its report next week and quick takes on Estée Lauder and Pfizer. Tom stressed that his near-term caution is about picking spots inside a longer bull market that he sees running into the early-to-mid 2030s.

Market sentiment and macro view

Earnings rotation and October

• Q3 S&P earnings growth is ~30%. The 493 grew 32.6% versus 22.6% for the Mag 7, a reversal from last quarter’s 27% versus 33%. Tom says the flip came one quarter earlier than he expected.
• October saw growth fall 5.5% and value rise ~5%, with tech down more than 8% and communication services down more than 10%. Staples led at +10.9%, with dividend payers and low-volatility names also outperforming. Per Carson, value topped growth by 10 points, which has not happened since tech rolled over in 2000.
• Healthcare has outperformed the index by more than 22 points over 100 sessions, the strongest stretch since 2001. Tom notes that healthcare relative to tech was at its lowest level in 27 years going into this year.
• ISM manufacturing printed 55.5 against a 54.1 forecast. Tom calls the ISM the macro indicator most correlated with small-cap relative performance, and Cass freight shipments are also rising.
• Tom expects indices to be “subdued to up” with the bigger gains under the surface in small caps, staples, healthcare, international, and value. The 493 carry lower index weights, so their strength lifts the index less. Equal weight beat cap weight by 6 points in October, and Tom favors it.

Election, rates, and the dollar

• Tom sees a Democratic House as pretty much a foregone conclusion and the Senate as a tossup. With gridlock, he expects less spending and less regulation, which the bond market is starting to price.
• The 10-year yield has fallen from 5.30% to well below 5%. Tom thinks it is headed lower over time, with TLT up sharply in four weeks. Tom is watching the 10-year at a trend line, looking for a break down through 4.80% that could take it to ~4.61%, which would help housing, QXO, and small caps.
• Markets have risen in 19 of 19 post-midterm periods through June 30 (average +15.7%). Two of those saw interim drawdowns: -14.7% in 2002–03 and -16.8% in 2018–19, when Chair Powell said the Fed was on “autopilot.”
• No pre-election index correction occurred this year, which normally sets up a 15–20% post-election run from a lower base. As a betting man, Tom leans toward the 2002 and 2018 pattern: an interim drawdown at the index level, meaning the AI trade, while the 493 keep making money.
• Tom sees the dollar’s recent move as a fake-out and expects a lower dollar over the next few years. On oil he said “maybe higher before lower” and added that he does not need to guess these things to make money.

AI cycle read

• Cumulative free cash flow for Alphabet, Amazon, Meta, Oracle, and Microsoft turned negative in the latest quarter, with Amazon burning $42B in Q3. Tom cited aggregate free cash flow of ~-$45B this year with next year expected to be ~4x that (~-$180B). He says the market will not look through it to a 2028 inflection.
• Hyperscalers have issued $182B of debt and $89B of equity in 2026 while buying back $7B of stock, down from $45B a couple of years ago, which Tom says ends the era of hyperscaler buybacks.
• Capital is getting harder to raise. OpenAI sought $30B and is settling for $20B at a lower valuation. Oracle sold $10B of stock at an 11% discount after its CDS spiked. Tom says the owner’s slice of the pie shrinks and the value assigned to that slice falls too.
• Tom separates AI cost centers from AI beneficiaries. PayPal is taking ~$600M of costs out through AI, with Etsy growing on agentic AI and Comstock supplying natural gas to the buildout.
• Semis and memory are down 30–40% or more. Tom thinks the sell side could push a year-end bounce to get Anthropic priced. If it works, he would use the strength to lighten up in that trade. Without it, he expects continued weakness.

Positioning, valuation, and sentiment

• Per WisdomTree, 51% of the S&P 500 trades above 10x sales. Tom says that before the zero-rate era, holding 20 or 30 unprofitable stocks at 10x sales would have lost 80–90% over rolling 10-year periods, with the zero-rate era the lone exception.
• Tom says rates of 3–6% make cash flow matter, with capital going to the companies showing returns. Apple at ~10x sales is its highest valuation on record.
• Friday was the largest gross deleveraging in history for long/short managers. Tom thinks one or two funds may have blown up, which will be known after the fact.
• Fear & Greed is at 26. Leveraged ETF flows are at a record, and one sentiment gauge shows extreme bullishness, which Tom reads as bearish for stocks. Small caps are seasonally strong in November and December.

Consumer, energy, and the long view

• Consumer spending is up 5% across income groups per Apollo, with the National Retail Federation expecting ~4% holiday growth. Sentiment has been low but is rebounding. Tom says “anything with a fork or a sneaker you can’t give away” and expects discretionary to do well over the next 6 to 12 months.
• Energy ETFs are up 40–60% and refiners ~80% this year. Tom says buying energy here is picking up nickels in front of a steamroller and calls Exxon extended. He prefers natural gas for AI power demand and emerging markets as his commodity themes.
• China saw its biggest inflow since April 2025 as the government buys stock. Tom’s charts show emerging markets, Europe, and Hong Kong looking ready to bounce into year-end, with small caps bouncing off support.
• Tom shared a long-cycle chart (~17-year sideways and 17–20-year rising periods) pointing to a bull market into 2033–34 with 20% corrections along the way. The chart author’s S&P 14,000 by 2034 is ~9% a year, which Tom called not unrealistic. He expects to get extremely cautious in the early-to-mid 2030s, finding spots to raise cash and get short at that point.

Long ideas — turnarounds, consumer, and healthcare

Names Tom walked through as current portfolio holdings or ideas he actively endorsed on the episode. Prices and levels are as cited on air.

Avoid, trim, or pass

Names and risk signals Tom flagged this week. Where a name is listed as a pass, he is declining to allocate capital.

Portfolio moves

• Adds. Tom continues to buy Dentsply Sirona (XRAY), GXO, and Alibaba. He bought “a ton” of QXO during the recent drawdown and picked up some Papa John’s.
• Other new money. Over recent weeks new money has also gone into Cooper Standard and Comstock. Tom said Boeing is buyable but is expressed differently in the portfolio than the other names.
• More selective. Many holdings have moved up quickly, so Tom says he has to be more selective. He expects the window for new buys to close fast in the coming weeks, with an election surprise the possible chance for one more bite.

Media appearances

Fox Business — with Stuart Varney on Varney & Co.

• Tom said gridlock, in the House or in both chambers, is accepted at this point and that the market likes it. Part of the reason yields are falling below 5% is that less can get passed. The Senate is a tossup.
• He wants to own AI companies that make profits, naming PayPal ($600M of AI cost take-out), Etsy (agentic AI), and Comstock (natural gas), rather than AI cost centers with negative free cash flow.
• On PayPal, his stock pick, Tom cited a beat and raise, ~$6B of free cash flow, buybacks of ~13% of the stock per year, and Venmo, buy now pay later, and Braintree growing 14%, ~20%, and 10%. At 9.4x vs. a 17x average, he expects a rerating.
• On chips, Tom said avoid, calling it a dead-cat bounce. He added that the 493 are outperforming and should continue into year-end, with the market wanting cash flow. On SpaceX and telecom, he said to play the toll takers and named Crown Castle.
• On VF Corp, his second pick, Tom called it a turnaround story with three of four brands growing, with Vans turning the corner. He cited Olivia Rodrigo’s nightly Vans and a possible $40–$50 stock over three to five years. On the $6B crypto custodian hack, he sees it as a hack of the custodian, not the technology, so not a major issue for crypto as a speculative asset.

Fox News Radio — with Lou Basenese on The Fox Business Rundown

• Tom said affordability is a key factor and that consumer sentiment, while low, is rebounding. Spending is up 5% and holiday sales are expected to grow ~4%. He called the House pretty much a foregone conclusion and the Senate a tossup.
• He walked through October’s rotation (tech and communication services down 8%+, staples up 10.9%, value up 5%, growth down 5%) and the earnings flip, with the 493 at 32% growth vs. 22% for the Mag 7. He tied the AI pullback to negative free cash flow and $278B of debt and equity raised this year.
• On the consumer, Tom described VF Corp’s turnaround under Bracken Darrell, who delivered a 26x return at Logitech over seven-plus years, with 75% of the portfolio back to growth. He called Papa John’s “a complete train wreck” but said he would not bet against CEO Todd Penegor. He named Chipotle as a less risky alternative and said Comstock, at a ~$4B market cap, can go up over time.

What to watch

Opinion only for Informational/Educational purposes only. Not investment Advice. Not a solicitation to buy or sell securities. Read full terms at HedgeFundTips.com under “Terms” link.

The post Hedge Fund Tips with Tom Hayes – VideoCast – Episode 368 appeared first on Hedge Fund Tips.

Article referenced in Podcast above:

“Healthy Strides” Stock Market (and Sentiment Results)…

Key Takeaways – Episode 368

A detailed summary of this week’s videocast with Tom Hayes, covering the portfolio walkthrough, stock ideas, positioning, and market sentiment.

Executive summary

Tom framed the week around the earnings rotation he has been describing since the summer. Q3 earnings growth is running ~30%, but the leadership has flipped: the S&P 493 grew earnings 32.6% against 22.6% for the Mag 7, one quarter earlier than he expected and the first time since 2022. October reflected it, with consumer staples up 10.9%, value up ~5%, and growth down 5.5%, while the Nasdaq fell ~9% and the S&P excluding AI rose ~5%. Tom ties the move to the AI cost centers, where cumulative free cash flow turned negative and capital raising is heavy, against the AI beneficiaries, where earnings are growing.

On the election, Tom calls a Democratic House pretty much a foregone conclusion with the Senate a tossup. He expects gridlock to help bonds, with the 10-year yield down from 5.30% to well below 5%. He cautioned against leaning on the post-midterm record: markets rose in 19 of 19 periods through June 30 for an average of 15.7%, but 2002–03 and 2018–19 each saw interim drawdowns of 14.7% and 16.8%. This year has not had the usual pre-election index correction, so Tom, as a betting man, leans toward an interim drawdown in the AI-led index names while the 493 keep working underneath.

“We are no longer in a zero interest rate policy, and that old dog won’t hunt.”

Tom Hayes, on valuations without zero rates

The weekly articles covered VF Corp and Baxter, with a Henry Schein read-through for Dentsply Sirona ahead of its report next week and quick takes on Estée Lauder and Pfizer. Tom stressed that his near-term caution is about picking spots inside a longer bull market that he sees running into the early-to-mid 2030s.

Market sentiment and macro view

Earnings rotation and October

• Q3 S&P earnings growth is ~30%. The 493 grew 32.6% versus 22.6% for the Mag 7, a reversal from last quarter’s 27% versus 33%. Tom says the flip came one quarter earlier than he expected.
• October saw growth fall 5.5% and value rise ~5%, with tech down more than 8% and communication services down more than 10%. Staples led at +10.9%, with dividend payers and low-volatility names also outperforming. Per Carson, value topped growth by 10 points, which has not happened since tech rolled over in 2000.
• Healthcare has outperformed the index by more than 22 points over 100 sessions, the strongest stretch since 2001. Tom notes that healthcare relative to tech was at its lowest level in 27 years going into this year.
• ISM manufacturing printed 55.5 against a 54.1 forecast. Tom calls the ISM the macro indicator most correlated with small-cap relative performance, and Cass freight shipments are also rising.
• Tom expects indices to be “subdued to up” with the bigger gains under the surface in small caps, staples, healthcare, international, and value. The 493 carry lower index weights, so their strength lifts the index less. Equal weight beat cap weight by 6 points in October, and Tom favors it.

Election, rates, and the dollar

• Tom sees a Democratic House as pretty much a foregone conclusion and the Senate as a tossup. With gridlock, he expects less spending and less regulation, which the bond market is starting to price.
• The 10-year yield has fallen from 5.30% to well below 5%. Tom thinks it is headed lower over time, with TLT up sharply in four weeks. Tom is watching the 10-year at a trend line, looking for a break down through 4.80% that could take it to ~4.61%, which would help housing, QXO, and small caps.
• Markets have risen in 19 of 19 post-midterm periods through June 30 (average +15.7%). Two of those saw interim drawdowns: -14.7% in 2002–03 and -16.8% in 2018–19, when Chair Powell said the Fed was on “autopilot.”
• No pre-election index correction occurred this year, which normally sets up a 15–20% post-election run from a lower base. As a betting man, Tom leans toward the 2002 and 2018 pattern: an interim drawdown at the index level, meaning the AI trade, while the 493 keep making money.
• Tom sees the dollar’s recent move as a fake-out and expects a lower dollar over the next few years. On oil he said “maybe higher before lower” and added that he does not need to guess these things to make money.

AI cycle read

• Cumulative free cash flow for Alphabet, Amazon, Meta, Oracle, and Microsoft turned negative in the latest quarter, with Amazon burning $42B in Q3. Tom cited aggregate free cash flow of ~-$45B this year with next year expected to be ~4x that (~-$180B). He says the market will not look through it to a 2028 inflection.
• Hyperscalers have issued $182B of debt and $89B of equity in 2026 while buying back $7B of stock, down from $45B a couple of years ago, which Tom says ends the era of hyperscaler buybacks.
• Capital is getting harder to raise. OpenAI sought $30B and is settling for $20B at a lower valuation. Oracle sold $10B of stock at an 11% discount after its CDS spiked. Tom says the owner’s slice of the pie shrinks and the value assigned to that slice falls too.
• Tom separates AI cost centers from AI beneficiaries. PayPal is taking ~$600M of costs out through AI, with Etsy growing on agentic AI and Comstock supplying natural gas to the buildout.
• Semis and memory are down 30–40% or more. Tom thinks the sell side could push a year-end bounce to get Anthropic priced. If it works, he would use the strength to lighten up in that trade. Without it, he expects continued weakness.

Positioning, valuation, and sentiment

• Per WisdomTree, 51% of the S&P 500 trades above 10x sales. Tom says that before the zero-rate era, holding 20 or 30 unprofitable stocks at 10x sales would have lost 80–90% over rolling 10-year periods, with the zero-rate era the lone exception.
• Tom says rates of 3–6% make cash flow matter, with capital going to the companies showing returns. Apple at ~10x sales is its highest valuation on record.
• Friday was the largest gross deleveraging in history for long/short managers. Tom thinks one or two funds may have blown up, which will be known after the fact.
• Fear & Greed is at 26. Leveraged ETF flows are at a record, and one sentiment gauge shows extreme bullishness, which Tom reads as bearish for stocks. Small caps are seasonally strong in November and December.

Consumer, energy, and the long view

• Consumer spending is up 5% across income groups per Apollo, with the National Retail Federation expecting ~4% holiday growth. Sentiment has been low but is rebounding. Tom says “anything with a fork or a sneaker you can’t give away” and expects discretionary to do well over the next 6 to 12 months.
• Energy ETFs are up 40–60% and refiners ~80% this year. Tom says buying energy here is picking up nickels in front of a steamroller and calls Exxon extended. He prefers natural gas for AI power demand and emerging markets as his commodity themes.
• China saw its biggest inflow since April 2025 as the government buys stock. Tom’s charts show emerging markets, Europe, and Hong Kong looking ready to bounce into year-end, with small caps bouncing off support.
• Tom shared a long-cycle chart (~17-year sideways and 17–20-year rising periods) pointing to a bull market into 2033–34 with 20% corrections along the way. The chart author’s S&P 14,000 by 2034 is ~9% a year, which Tom called not unrealistic. He expects to get extremely cautious in the early-to-mid 2030s, finding spots to raise cash and get short at that point.

Long ideas — turnarounds, consumer, and healthcare

Names Tom walked through as current portfolio holdings or ideas he actively endorsed on the episode. Prices and levels are as cited on air.

Avoid, trim, or pass

Names and risk signals Tom flagged this week. Where a name is listed as a pass, he is declining to allocate capital.

Portfolio moves

• Adds. Tom continues to buy Dentsply Sirona (XRAY), GXO, and Alibaba. He bought “a ton” of QXO during the recent drawdown and picked up some Papa John’s.
• Other new money. Over recent weeks new money has also gone into Cooper Standard and Comstock. Tom said Boeing is buyable but is expressed differently in the portfolio than the other names.
• More selective. Many holdings have moved up quickly, so Tom says he has to be more selective. He expects the window for new buys to close fast in the coming weeks, with an election surprise the possible chance for one more bite.

Media appearances

Fox Business — with Stuart Varney on Varney & Co.

• Tom said gridlock, in the House or in both chambers, is accepted at this point and that the market likes it. Part of the reason yields are falling below 5% is that less can get passed. The Senate is a tossup.
• He wants to own AI companies that make profits, naming PayPal ($600M of AI cost take-out), Etsy (agentic AI), and Comstock (natural gas), rather than AI cost centers with negative free cash flow.
• On PayPal, his stock pick, Tom cited a beat and raise, ~$6B of free cash flow, buybacks of ~13% of the stock per year, and Venmo, buy now pay later, and Braintree growing 14%, ~20%, and 10%. At 9.4x vs. a 17x average, he expects a rerating.
• On chips, Tom said avoid, calling it a dead-cat bounce. He added that the 493 are outperforming and should continue into year-end, with the market wanting cash flow. On SpaceX and telecom, he said to play the toll takers and named Crown Castle.
• On VF Corp, his second pick, Tom called it a turnaround story with three of four brands growing, with Vans turning the corner. He cited Olivia Rodrigo’s nightly Vans and a possible $40–$50 stock over three to five years. On the $6B crypto custodian hack, he sees it as a hack of the custodian, not the technology, so not a major issue for crypto as a speculative asset.

Fox News Radio — with Lou Basenese on The Fox Business Rundown

• Tom said affordability is a key factor and that consumer sentiment, while low, is rebounding. Spending is up 5% and holiday sales are expected to grow ~4%. He called the House pretty much a foregone conclusion and the Senate a tossup.
• He walked through October’s rotation (tech and communication services down 8%+, staples up 10.9%, value up 5%, growth down 5%) and the earnings flip, with the 493 at 32% growth vs. 22% for the Mag 7. He tied the AI pullback to negative free cash flow and $278B of debt and equity raised this year.
• On the consumer, Tom described VF Corp’s turnaround under Bracken Darrell, who delivered a 26x return at Logitech over seven-plus years, with 75% of the portfolio back to growth. He called Papa John’s “a complete train wreck” but said he would not bet against CEO Todd Penegor. He named Chipotle as a less risky alternative and said Comstock, at a ~$4B market cap, can go up over time.

What to watch

Opinion only for Informational/Educational purposes only. Not investment Advice. Not a solicitation to buy or sell securities. Read full terms at HedgeFundTips.com under “Terms” link.

The post Hedge Fund Tips with Tom Hayes – Podcast – Episode 368 appeared first on Hedge Fund Tips.

The topics of my presentations will be:

• Post-Election-Year Pop – and How to Play It: 2027 market outlook, including why to expect a post-election-year pop and three top stock picks (11:00 AM – 11:25 AM)

• “Turnaround Tom’s” Investment Framework: A workshop on how to buy good businesses at great prices for attractive returns over time (1:30 PM – 2:15 PM)

Get Your Tickets Here

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S&P 500 Bullish Percent

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Nasdaq Stocks Above 200 Day MA

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The column under the date 11/3/2026 has a letter that represents the movement in 2026 earnings estimates since the most recent print (9/4/2026). “U” means 2026 estimates are UP in the last 60 days. “D” means 2026 estimates are DOWN in the last 60 days. “S” means 2026 estimates have remained the SAME in the last 60 days. The column entitled “1yr Target Est” is the Wall Street consensus 12 month price target for each stock.

What this table is telling us is that estimates have come UP. More estimates came UP for 2026 in the past 60 days than went DOWN – The Up:Down ratio was 21:9.

The cumulative 2026 earnings power of these 30 stocks was revised UP by +2.01% in the past 60 days. 2027 estimates were revised UP by +0.72%.

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The column under the date 11/3/2026 has a letter that represents the movement in 2026 earnings estimates since the most recent print (9/4/2026). “U” means 2026 estimates are UP in the last 60 days. “D” means 2026 estimates are DOWN in the last 60 days. “S” means 2026 estimates have remained the SAME in the last 60 days. The column entitled “1yr Target Est” is the Wall Street consensus 12 month price target for each stock.

What this table is telling us is that estimates have come UP. More estimates came UP for 2026 in the past 60 days than went DOWN. – The Up:Down ratio was 18:9. The rest remained the same.

The cumulative 2026 earnings power of these 30 stocks was revised UP by +4.18% in the past 60 days. 2027 estimates were revised UP by +2.62%.

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S&P Small Cap Advances

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On Monday, I joined the great Stuart Varney on Fox Business’ Varney & Co. to discuss markets, the economy, outlook, midterms, AI, tech, rotation, PayPal ($PYPL), VF Corp ($VFC), Crown Castle ($CCI), SpaceX ($SPCX), and a lot more. Thanks to Stuart, Maggie Edwards, and Nick Palazzo for having me on:

On Monday, I joined my good friend Lou Basenese on the Fox Business Rundown podcast to discuss markets, the economy, outlook, midterms, AI, tech, rotation, the Un-Magnificent 493, the consumer, healthcare, energy, VF Corp ($VFC), Papa John’s ($PZZA), Comstock Resources ($CRK), and a lot more. Thanks to Lou for having me on:

VFC Update

For newer readers, here’s a quick overview of the key drivers behind our thesis on VF Corp, a global apparel and footwear leader with a portfolio of iconic brands, now firmly in the growth phase of its turnaround with significant operating leverage ahead:

Company Overview

• Founded in 1899 as a glove and mittens manufacturer. Evolved into a global apparel and footwear powerhouse via decades of acquisitions and brand building.
• Portfolio led by The North Face, Vans, Timberland, and Altra, with smaller brands including JanSport, Eastpak, Kipling, Smartwool, Icebreaker, and Napapijri.
• Geographic sales: ~50% Americas, ~35% EMEA, ~15% APAC.
• FY2026 revenue: $9.6B (+4% Y/Y, +1% FXN ex-Dickies), the first full year of growth in three years.
• Trades at just ~13.5x NTM earnings (17-18x long-term average). 0.6x relative valuation to S&P vs. long-term average 1.0x.

Management – Bracken Darrell

• Appointed CEO in July 2023.
• Credited with the Old Spice turnaround at P&G, where he tripled market share in two years, one of P&G’s most successful brand relaunches.
• Took over as Logitech CEO in 2013 with the stock down 82%, sales declining, and margins in collapse. Over eight years, took the stock from $5 to $133, a 26x bagger.
• Has purchased ~$3.5M in VFC shares on the open market since his appointment. ~90% of his compensation is tied to financial targets, with 50% of stock options linked to long-term performance goals.
• CFO transition (announced Q1’27): Paul Vogel stepped down effective Aug 1, moving to advisory; COO Abhishek Dalmia adds the CFO title in a combined CFO/COO role.
• Dalmia brings 25+ years across global consumer companies (BCG Managing Director/Partner, Global SVP Digital at Lululemon, leadership roles at Dell, earlier GE and Citibank).

Supreme and Dickies Sale

• Supreme was acquired in 2020 for $2.1B (~15x EBITDA, ~4x sales), widely viewed as an overpay. Sold to EssilorLuxottica for $1.5B cash (~12x EBITDA, ~2.5x sales). $600M below purchase price, but far better than feared.
• Dickies sold to Bluestar Alliance for $600M cash (~1.2x sales, >20x EBITDA). Sale closed November 2025.
• Total proceeds from disposals: $2.1B in cash directed toward debt paydown.

Balance Sheet Cleanup

• FY26 leverage ratio of 3.1x, down a full turn vs. LY and two full turns vs. FYE24 of 5.1x.
• Net debt of $4.6B as of Q2’27, down $1.1B or (20%) Y/Y. Net debt ex-lease liabilities of $3.1B, down $1.1B or (26%) Y/Y and down from $5.8B over the last three years (nearly half paid off).
• FY27 leverage guide of 2.6x to 2.9x. On track for the medium-term target of 2.5x or better by FY28. Plans to prepay the April 2027 maturity in March.
• FY2026 FCF of $405M, up over $90M Y/Y (excludes $100M net pension termination benefit).
• FY27 guide of flat to up vs. LY of $405M, despite a ~$100M step-up in CapEx driven largely by Timberland full-price store openings, with actual FCF of ~$515M or better including ~$110M of net tariff refunds. (H1’27 FCF ($322.7M), up ~$130M Y/Y including tariff refunds received YTD.)

Return to Growth

• After three years of revenue declines, the top line has officially inflected.
• FY26 marked the first full year of growth since FY23. 75% of the portfolio is now growing, vs. 43% in FY24, with management targeting 80%+ over the long term.
• Americas +5% FXN ex-Dickies in Q2’27 with growth across both channels. Management’s top priority is exporting the Americas DTC playbook to EMEA, where DTC is already outperforming wholesale.
• FY2027 guide of revenue +2% or better FXN vs. LY ex-Dickies (raised in Q1 from +1% to +2%, reaffirmed in Q2), with The North Face and Timberland each up mid-single digits, continued growth at Altra, and Vans declines moderating to mid-single digits.
• Partnered with DoorDash to make The North Face, Vans, and Timberland available on DoorDash’s expanding retail Marketplace, offering fast delivery and a new streamlined returns option.
• NRF forecasts November and December retail sales up 4.2% Y/Y to $1.013T, the fastest growth since 2021 (+12.6%); compares with 2025 holiday sales up 3.1% to $972B.

Brands Overview

Vans

• Acquired in 2004 and grew 10x over 15 years. FY2026 revenues remain >40% below the FY2022 peak.
• FY26 revenue: $2,149.1M (-9% reported, -11% FXN)
• Core issues: overexposure to value channels, brand dilution, over-reliance on legacy franchises, and a loss of connection with the core audience.
• Cleanup underway under new brand president Sun Choe, former LULU chief product officer: exiting value channels, closing unprofitable stores and rightsizing inventory, with solid gross margin expansion already delivered.
• Q2’27 (9.8%) reported or (10%) FXN globally (H1 (8.8%)), with FY27 guidance of mid-single digit decline vs. -11% in FY26 and -15% in FY25; Q3 guided to (4%) or better and H2 to (2%) or better as wholesale inflects on firm orders for Fall/Winter ‘26 and Spring/Summer ‘27.
• Global DTC grew in Q2’27 for the first time in almost five years, building on the Americas DTC recovery that began in Q4’26 (+5%, the first growth in over four years) and the clearest signal that the turnaround is taking hold.
• Wholesale is the remaining gap: backward-looking sell-through creates a lag, with management expecting wholesale to inflect in 2H FY27 on the current order book at -2% or better. The Vans inflection is here.
• Vans shoes were heating up in May and June as Spring/Summer 2027 wholesale orders began, with the usual 6-9 month lag putting that momentum in front of those bookings.
• Americas is >50% of total Vans sales and Americas DTC is ~40% of global Vans business.
• Authentic another strong double-digit quarter, Slip-On returned to DTC growth, and icons grew in DTC led by Old Skool, with the Pearlized Old Skool Yacht Club selling through 100% in the Americas in under 24 hours.
• New styles (Super Lowpro, Mules, Loafer) adding heat, with the Satoshi collab DTC drop selling out in five minutes. 60%+ of stores now comping positive.
• Vans trades on StockX rose 238% in 1H26, with the average price premium expanding from +12% to +69%.
• Piper Sandler upgraded on Vans stabilization ($20 PT), with Vans holding steady as a favorite footwear brand among all males in its Fall Teen Survey (~9,000 teens) after declining in the past three surveys, while moving up among upper-income males.
• September Vans DTC foot traffic the best since February 2023, suggesting mindshare has bottomed with growth expected as newness scales across wholesale into 2H FY27 and FY28.
• Truist sees fashion trends rotating away from athletic aesthetics in a way that benefits Vans, with major retailers seeking to fill shelf space vacated by Nike lifestyle pullbacks.
• Truist data shows Vans the focus of 10% of Foot Locker’s brand-related Instagram posts since June 2026, up from 1% in 2H 2025.
• Buzz from Olivia Rodrigo wearing Vans at Unraveled Tour shows, with 10+ pairs worn over the past two weeks.
• Olivia Rodrigo wearing Vans nightly at sold out Unraveled Tour (Oct ‘26-May ‘27).
• Vans now selling at Zara, with three Vans Authentic styles featured on Zara’s U.S. e-commerce platforms as the “Zara Vans Sneakers.”
• SZA joined Vans as its first artistic director in August 2025 under a multi-year creative partnership.
• SZA (22.9M Instagram followers) launched the first Vansza drop Oct 22nd, 18 products including two shoes.
• Second drop set for April 8, 2027, featuring the Vansza camouflage Knu Skools.
• Vans ranked the No. 2 fashion footwear brand in the AlixPartners Consumer Sentiment Index.
• Lyst shows interest in Vans up 29% Y/Y, fueled by 2010s fashion nostalgia, with the Vans Authentic resurgence set to continue.

The North Face

• The world’s largest outdoor brand. Goal is to become a true four-season brand.
• FY26 revenue: $4,005.8M (+8% reported, +5% FXN)
• Q2’27 +4% Y/Y or +4% FXN, the eighth straight quarter of FXN growth and well ahead of management’s ~flat expectation, with the Americas +8%. Footwear up double digits across all regions. Named a top 10 athletic clothing brand in Piper Sandler’s teen survey for the first time in three years.
• Recently announced 8-year strategic partnership with the U.S. Ski and Snowboard teams through at least 2034, including the upcoming Winter Olympics, further cementing performance credentials. First drop lands this quarter.
• Long-term targets: 2x apparel, 2x bags/equipment, 3x footwear. Management reiterated the long-term ambition of doubling The North Face’s revenue base over time.

Timberland

• Q2’27 +4% Y/Y or +4% FXN, the eighth straight quarter of FXN growth. Americas +15%, partially offset by APAC (21%) as VF works through changes with its regional partner.
• FY26 revenue: $1,735.9M (+8% reported, +5% FXN)
• Major DTC push in the Americas, 19 full-price stores now open with outsized productivity validating the new operating model. Significant whitespace ahead.
• 6″ Premium franchise continues to drive performance, with shoes the fastest growing category. Boat shoe also showing strong results across all regions with significant growth potential ahead.
• Timberland broke into the Top 10 at No. 10 position in the teen survey for the first time in survey history (Piper Sandler). Also ranked the No. 1 fashion footwear brand in the AlixPartners Consumer Sentiment Index.

Altra

• The #1 trail running shoe in the U.S. and the fastest-growing brand in road running. U.S. awareness remains below 10%, even lower globally.
• Acquired in 2018 at ~$50M in revenue. FY26 revenues crossed $270M, a 5x+ increase. Q2’27 up 40%+ across all regions and channels, marking the 7th straight quarter of double-digit growth.
• Driven by major franchise launches including the Lone Peak 9 and Experience. Road running has now overtaken trail as the larger business for the brand.
• In FY27, Altra footwear growth is expected to fully offset the Vans footwear decline.
• Management sees $1B+ in annual sales potential, a large and underappreciated growth driver within the portfolio.

Margin Expansion

• Delivered >$225M in structural SG&A savings since FY24, now fully in the run rate.
• Adjusted gross margin ex-Dickies of 55.2% in FY26, up 110 bps Y/Y and up 360 bps over the past two years (~100 bps from Dickies divestiture, ~260 bps from operational improvements including higher-margin product mix, targeted pricing, and AI-powered markdown management).
• Q2’27 adjusted GM ex-Dickies of 55.4%, up 290 bps Y/Y (~180 bps structural, ~110 bps FX tailwind).
• Adjusted operating margin ex-Dickies of 7.0% in FY26, up 110 bps Y/Y and up 220 bps vs. FY24. Q2’27 adjusted OM ex-Dickies of 13.5%, up 170 bps Y/Y, on adjusted OI of $364M, well ahead of ~$315M guidance.
• Medium-term targets: gross margin at or above 55% (achieved), a 10% operating margin exit run rate by FY2028, and 10% or better for full-year FY2029. These targets are based on cost savings alone and assume zero top-line growth.
• Each $1B in added sales drives ~150-200 bps of EBIT margin expansion via operating leverage.
• Pre-pandemic historical operating margins were 12-13%.
• FY2027 outlook: adjusted operating margin of ~8%, supported by gross margin expansion and SG&A leverage (mix now leaning more on gross margin than SG&A).
• Tariff headwind of $70-80M assumed in back half, with management confident in mitigating “almost all of it” via sourcing footprint changes and vendor partnerships.

Q2 Commentary

VF Corp. continues to hit its stride, with Q2 revenue of $2.70B growing +1% C$ ex-Dickies against guidance for a ~flat quarter, while adjusted operating income of $363.7M cleared management’s ~$315M guide by nearly $50M. The bottom line was even stronger, as adjusted EPS of $0.70 jumped +42.9% Y/Y to come in $0.17 ahead of consensus, with management reaffirming its full-year outlook across revenue, margins, free cash flow, and leverage.

Shares initially slipped ~5% on the print, with investors likely frustrated by another double-digit decline at Vans after months of building brand heat heading into the release. Once the market digested the call, however, it became clear that the pieces are falling into place for a much stronger second half, which is exactly what investors are now sniffing out as shares have climbed nearly 18% since earnings.

The biggest takeaway from the quarter is that VF is back in growth mode. 75% of the business by revenue grew in Q2, up from just 43% in FY24, putting VF within a stone’s throw of the 80%+ that Bracken Darrell considers the hallmark of a healthy multi-brand company. Getting to this point has required three years of heavy lifting under Darrell, focused on cutting costs and repairing an overleveraged balance sheet. That work has laid the foundation for broader growth to drive operating leverage and unlock normalized earnings power that the market has yet to fully appreciate.

Leading the way is The North Face, the workhorse of the portfolio, which accounted for ~45% of revenue in the quarter while growing +4% C$ to $1.21B for its eighth straight quarter of growth. Growth was led by the Americas at +8% C$, while performance was broad-based across categories, with apparel driven by bottoms and transitional jackets, footwear growing double digits in every region, and bags posting another strong quarter. That momentum was confirmed in Piper Sandler’s teen survey, which named The North Face a top 10 athletic clothing brand for the first time in three years. Even as the largest brand in the portfolio, The North Face still has a long runway ahead, with category growth, share gains, new categories, product elevation, and new markets supporting management’s ambition of doubling the brand over time.

Timberland is another bright spot in VF’s recovering portfolio. After spending most of the time since VF acquired it in 2011 stuck in a ~$1.7B revenue range, Timberland finally looks ready to break out, growing +4% C$ to $525.9M to notch its eighth straight quarter of growth, led by a standout +15% in the Americas. That strength comes on the heels of a continued DTC push, with five full-price stores added during the quarter to bring the Americas total to 19 and more planned in key cities. Growth is also broadening beyond the Yellow Boot, as shoes and other boots grew faster than the iconic 6-inch boot, while management continues to see significant white space in sneakers and apparel alongside untapped potential in Timberland PRO over time. The brand’s progress was also confirmed in Piper Sandler’s teen survey, where Timberland broke into the top 10 footwear brands for the first time in the survey’s history.

Then there is Altra, which is on track to become VF’s next $1B+ brand. It grew 40%+ in every region and channel to remain the fastest-growing brand in the portfolio. Altra already leads in trail running, while road running is a market ~10x larger, giving the brand a massive runway with U.S. awareness still below 10%. To put that growth into perspective, Altra’s footwear growth alone is expected to fully offset the decline in Vans footwear this year, a great example of one of the many outs built into this investment.

That brings us to Vans, which accounts for the vast majority of the ~25% of the portfolio still in decline and is ultimately the needle mover that takes VF from low-single-digit growth to mid-single digits and higher over time. Another double-digit drop in Q2 drove the initial frustration around the print, with revenue down (10%) C$ and ~$3-4M shy of guidance as wholesale destocking continued. What that headline decline masks, however, is the most encouraging data point of the quarter: global DTC returned to growth for the first time in almost five years.

This is the next step in the recovery management laid out from the beginning. Americas e-commerce first turned positive in Q3 FY26 for the first time in over four years, followed by Americas DTC returning to growth in Q4 FY26 after 14 consecutive quarterly declines and growing again in Q1 as e-commerce accelerated. This quarter, the recovery broadened further, with continued growth in the Americas alongside improving performance in EMEA and encouraging signs in APAC. Traffic improved Y/Y across both stores and e-commerce, while slightly more than 60% of stores are now comping positive.

The last domino to fall is the stubborn wholesale channel, which comes down to the timing lag every apparel and footwear company experiences. Vans tests new ideas in small batches through e-commerce and select collabs before moving the winners into select stores and eventually scaling them across the fleet. Wholesale typically trails DTC by 6-9 months as retailers wait for proven sell-through before placing orders. This means the heat built over the past several months comes at a perfect time, just as retailers are placing orders for Fall/Winter ’26 and Spring/Summer ’27. Those firm orders give management confidence in a guide of (4%) or better in Q3 and (2%) or better in H2, with the larger wholesale swing expected in Q4. Given the brand heat we are seeing, we would not be surprised to see Vans inflect positive in Q4, which would mark the brand’s first quarter of growth in ~five years.

More importantly, the recovery is being driven by the product itself, with Vans refreshing its icons while launching new silhouettes as fashion shifts away from athletic sneaker styles toward the classic Vans look. Old Skool led icon growth in DTC, Authentic posted another strong double-digit quarter, and Slip-On returned to growth, while new styles such as the Super Lowpro, Mules, and Loafer added further heat. Growth built on product tends to feed on itself, with heat in the icons pulling consumers back into the core while newness keeps them coming back. Nowhere is that clearer than Pearlized, where the Old Skool Yacht Club sold through 100% in the Americas in less than 24 hours as part of a six-release series running from September through December, with four drops still to come.

Vans is also leaning into culture to build on its product momentum. SZA joined the brand as its first-ever artistic director in August 2025, with the first Vansza drop of 18 products launching on October 22 to massive demand. A second drop is already set for April 2027.

The brand is also getting a lift from Olivia Rodrigo, the Taylor Swift of today’s teen generation, who has become something of an unofficial brand ambassador. She has been wearing multiple pairs of Vans nightly on her sold-out Unraveled Tour, with custom pink and white checkerboards among the highlights.

At the high end, the Satoshi Nakamoto collab drew such demand at ComplexCon that Vans had to briefly shut down its booth, with a follow-up DTC drop selling out in five minutes and the shoe earning a spot on ComplexCon’s top 10 Sneaker of the Year list.

Third-party data is telling the same story. In Piper Sandler’s survey of ~9,000 teens, Vans held its No. 7 spot as a favorite footwear brand among male teens after declining in each of the prior three surveys, while AlixPartners ranked Vans the #2 fashion footwear brand in its Consumer Sentiment Index. Lyst also ranked Vans No. 4 on its top 10 hottest brands list for Q3, with interest up 29% Y/Y, putting Vans in very good company.

With The North Face, Timberland, and Altra already growing and Vans moving from a drag toward a contributor, VF is on a path from low-single-digit growth to mid-single digits and beyond. The real upside comes from what happens when that growth combines with the three earnings levers Bracken highlighted on the earnings call as the most underappreciated part of the VF story.

The first lever is operating leverage, where the heavy lifting of the past few years is already paying off. Gross margin has expanded on lower product costs, better planning, and pricing discipline, with adjusted gross margin rising 290 bps Y/Y to 55.4% in Q2, ~180 bps of which was structural. Full-year gross margin is expected to be up again, keeping VF comfortably above its FY28 target of 55%.

On the cost side, management has taken >$225M of structural SG&A out of the business since FY24, savings that remain fully in the run rate. VF is already getting its first taste of operating leverage, with operating margin climbing from a trough of 4.8% in FY24 (including Dickies) to 7.0% in FY26 and ~8% this year, on the way to 10% or better in FY29. Bracken made clear that VF is “absolutely not stopping at 10%,” a target that looks well within reach for a business used to running 12-13% operating margins before the pandemic.

The second lever comes from the balance sheet. The sales of Supreme and Dickies brought in $2.1B of cash that went straight to debt paydown, helping cut net debt excluding lease liabilities from $5.8B three years ago to $3.1B today, with leverage falling from 5.1x in FY24 to 3.1x in FY26 and guided to 2.6x to 2.9x by the end of this year. That progress is now flowing through the P&L, with net interest expense nearly cut in half to $48.3M through the first half of FY27 from $87.3M LY. With VF planning to prepay its April 2027 maturity in March as it works toward its 2.5x or better target by FY28, interest expense should keep losing its bite.

The third lever is a falling tax rate. VF’s tax structure has historically resulted in a relatively high rate, which management expects to decline from the mid-30s to the low 20s over the next few years. That process is already underway, with the FY27 tax rate lowered to the high 20s from the low 30s following the resolution of historical tax matters.

Q2 showed the potential of all three levers working together. ~1% revenue growth produced +15.5% growth in adjusted operating income and +42.9% growth in EPS, as lower interest expense and a lower tax rate helped earnings grow at nearly 3x the rate of operating income. Obviously, that is not a result we expect every quarter, especially with VF still working off a low base, but it nevertheless highlights the earnings potential before growth has really taken off.

That combination is what we expect to restore VF’s normalized earnings power, which we believe the market continues to overlook. Consensus currently sits at $1.17 of EPS this year (+39.7%), $1.40 for FY28 (+19.3%), and $1.68 for FY29 (+19.7%), despite revenue growth of just ~2.4%, ~3.1%, and ~3.7%, respectively. A Vans recovery that lifts VF to mid-single-digit growth, alongside operating margins that management has no intention of capping at 10%, puts well over $2 of EPS within reach. At ~13.5x forward earnings versus its 20-year average of 17-18x, a re-rating toward historical multiples offers a credible path to a $40-50 stock over the coming years.

So even as the market begins to give VF credit for the turnaround, we believe it still underappreciates the earnings power the past three years of heavy lifting can unlock. With the rest of the portfolio already firing and Vans showing signs of life, VF’s best days are still ahead.

Q2 Earnings Breakdown

10 Key Points

1) VF reported Q2 revenue of $2.70B, +1% C$ ex-Dickies, ahead of guidance for a ~flat C$ quarter and ~$30M above the Street. By region, the Americas grew +5% C$, while EMEA declined (1%) C$ and APAC declined (7%) C$. By channel, DTC grew +3% C$, including Digital at +8% C$, while Wholesale was flat as Vans destocking offset growth elsewhere in the portfolio. 75% of the business by revenue is now growing, compared to 43% in FY24, moving VF closer to management’s long-term target of 80%+ for a healthy multi-brand company.

2) Adjusted EPS ex-Dickies came in at $0.70, up +42.9% from $0.49 LY and $0.17 ahead of consensus of $0.53. EPS grew at nearly 3x the rate of adjusted operating income (+15.5%) on just ~1% top-line growth, with all three forms of leverage management highlighted on the call showing up at once: operating leverage, lower interest expense, and a lower tax rate. Net interest expense fell to $23.7M from $46.2M LY, below the ~$30M guided, as debt paydown flows through the P&L, while the effective tax rate came in at ~18% following the resolution of historical tax matters.

3) Adjusted gross margin ex-Dickies expanded 290 bps Y/Y to 55.4%. ~180 bps of that expansion was structural, driven by lower product costs, integrated business planning, and surgical price increases. The remaining ~110 bps was an FX tailwind that reversed Q1’s ~140 bps headwind, keeping full-year FX tracking ~flat. Tariffs had minimal net impact as VF lapped similar rates, with help from vendor negotiations, while tariff refunds carry no net gross margin impact in FY27. YTD adjusted gross margin reached 55.2%, up 180 bps Y/Y, with management expecting Q3 gross margin to rise again, though at a slower pace than Q2’s structural gains as $70-80M of unmitigated H2 tariff costs flow through. This keeps VF on track for full-year gross margin expansion and comfortably above its FY28 target of 55%.

4) Adjusted operating income ex-Dickies of $363.7M grew +15.5% Y/Y and topped guidance of ~$315M by ~$50M. That produced an adjusted operating margin of 13.5%, up 170 bps Y/Y. ~Half of the beat came from stronger revenue and gross margin, while the other half reflected ~$25M of SG&A shifting from Q2 into Q3. Adjusted SG&A rose +4.3% Y/Y to 41.9% of revenue, up 120 bps, as VF reinvests in DTC, marketing, and product design and innovation, with the >$225M of structural savings taken out since FY24 remaining in the run rate. YTD adjusted operating margin reached 6.2%, up 30 bps Y/Y, with management guiding Q3 adjusted operating income to ~$390M or better, ~$50M+ above LY, including the SG&A shifted from Q2. This keeps VF on track for a full-year adjusted operating margin of ~8%, up from 7.0% in FY26.

5) The North Face grew +4% C$ to $1.21B, its eighth straight quarter of growth and well ahead of management’s ~flat expectation. Part of the upside reflected wholesale demand landing in Q2 rather than Q3, with the balance coming from stronger execution in Americas DTC. By region, the Americas grew +8% C$ and EMEA grew +3% C$, while APAC declined (4%) C$. Growth was broad-based across categories, with apparel led by bottoms and transitional jackets such as the Quest and Yumiori Fleece, while footwear grew double digits across every region and bags posted another strong quarter. The brand was named a top 10 athletic clothing brand in Piper Sandler’s teen survey for the first time in three years, with the reversible Nuptse launching this season alongside the first U.S. Ski & Snowboard drop. Management guided Q3 to +4% or better while raising its full-year outlook to up mid-single digits, with Bracken reiterating that the brand can double over time.

6) Vans declined (10%) C$ to $547.6M, ~$3-4M softer than guided as continued wholesale destocking weighed on the quarter, with the Americas at (7%) C$, EMEA at (14%) C$, and APAC at (18%) C$. Beneath the headline decline, global DTC returned to growth for the first time in almost five years, extending management’s progression from U.S. e-commerce to Americas DTC to global DTC. Product is driving the turn, as Old Skool led icon growth on new versions like Pearlized and Souvenir, Authentic delivered another strong double-digit quarter, and Slip-On returned to growth, while new styles such as the Super Lowpro, Mules, and Loafer are adding further heat. Wholesale continues to trail DTC by its typical 6-9 month lag, with new silhouettes tested in e-commerce and stores now flowing into Spring/Summer ’27 sell-in. Management guided Q3 to (4%) or better and H2 to (2%) or better, with the larger wholesale improvement expected in Q4 given Q3’s seasonally heavier DTC mix. Firm Fall/Winter ’26 and Spring/Summer ’27 orders, primarily from existing partners expanding shelf space and adopting new styles, keep the full year on track for a mid-single-digit decline versus (11%) in FY26.

7) Timberland grew +4% C$ to $525.9M, its eighth straight quarter of growth, led by the Americas at +15% C$. EMEA grew +1% C$, while APAC declined (21%) C$ (~$12M), in line with expectations as VF works through changes with its regional partner. The 6-inch boot continued to grow, though shoes and other boots grew faster as franchises like the Field Boot and Boat Shoe broaden growth beyond the core. Management sees sneakers and apparel as significant longer-term growth opportunities, while Timberland PRO offers another lever as core franchises resonate with consumers and a new multiyear NASCAR partnership expands the brand’s reach. VF opened five more full-price stores in the Americas, bringing the total to 19, with plans for selective expansion in key cities. Management guided Q3 to +4% or better while raising its full-year outlook to up mid-single digits.

8) Other Brands grew +6% C$ ex-Dickies to $414.3M, once again led by Altra, which grew 40%+ with gains in every region and channel to remain VF’s fastest-growing brand. Growth was strong across both Road and Trail, led by the Torin 9, which delivered the season’s biggest launch with strong sell-through. With Altra already leading in trail and road running representing a market ~10x larger, the brand has massive runway toward management’s $1B+ ambition.

9) Free cash flow was an outflow of ~($207M) in Q2 versus ~($262M) LY, bringing H1 to ($322.7M), a $130.4M improvement Y/Y driven by tariff refunds collected YTD. Normalized H1 FCF was ~in line with LY and consistent with historical seasonality. Management reaffirmed FY27 FCF of flat to up versus the normalized $405M baseline, with actual FCF expected at ~$515M or better once ~$110M of net tariff refunds are included. On the balance sheet, net debt ended the quarter at $4.6B, down $1.1B or (20%) Y/Y, while net debt excluding lease liabilities fell to $3.1B, down $1.1B or (26%) Y/Y. Net inventories rose +7% Y/Y as a deliberate build to support H2 demand, with management flagging inventory management as a key priority for FY28 and beyond. Debt paydown remains the top capital allocation priority, with VF planning to prepay its April 2027 maturity in March as it works toward FYE27 leverage of 2.6x to 2.9x.

10) Management reaffirmed its FY27 revenue outlook of +2% or better C$ ex-Dickies, raising its full-year outlook for The North Face and Timberland to up mid-single digits each while maintaining its outlook for Vans at a mid-single-digit decline. Adjusted gross margin is expected to increase Y/Y, supporting an adjusted operating margin outlook of ~8%, while the full-year effective tax rate was lowered to the high 20s from the low 30s following the resolution of historical tax matters. For Q3, management guided revenue to +3% or better, an acceleration from H1’s +1% C$ pace, as The North Face and Timberland each grow +4% or better and the Vans decline narrows to (4%) or better. Medium-term targets were also reaffirmed, calling for leverage of 2.5x or better by FY28 and an adjusted operating margin of 10% or better for FY29, with Bracken stressing that VF is “absolutely not stopping at 10%.”

Earnings Call Highlights

Morningstar Analyst Note

BAX Update

For newer readers, here’s a quick overview of the key drivers behind our thesis on Baxter, a century-old medtech leader where temporary headwinds and operational missteps have created an opportunity for a Danaher-trained CEO to reset execution and restore normalized earnings power:

Company Overview

• Founded in 1931 in Chicago. The first commercial manufacturer of prepared IV solutions and a supplier of blood products to U.S. armed forces in WWII. An iconic ~100-year medtech brand.
• Global leader in IV fluids/infusion systems, inhaled anesthetics, and hospital essentials (infusion pumps, smart beds, injectable drugs).
• Two reportable segments as of Q2 2026: Medical Products & Therapies (~70% of sales, now including the former Pharmaceuticals business, folded into the new Infusion Therapies & Platforms division) and Healthcare Systems & Technologies (~27%), plus Other (~3%, Vantive/Kidney Care MSA revenue).
• FY2025 revenue: $11.24B (+6% Y/Y).
• U.S. ~55% of sales, international ~45%.
• Shares down ~72% from the 2020 peak (~$83, market cap >$47B to ~$13B today).
• Historically, rare 50%+ drawdowns in BAX have delivered multi-baggers on the recovery. Only four other instances in its operating history: ~59% in 1974, 61% in 1984, 68% in 2003, and most recently, 81% in March 2026.

Management — CEO Andrew Hider

• Appointed July 2025, started September 3, 2025.
• Previously CEO of ATS Corporation since 2017, where he delivered a ~5x bagger in six years (automation solutions; Baxter was a customer).
• Spent 10+ years at Danaher mastering the “Danaher Way” — continuous improvement, operational excellence, and execution discipline.
• New CFO John Rogers joined October 1, bringing a med tech background and a track record of leading complex organizations through transformation and performance improvement.
• Already rolled out the Baxter Growth and Performance System (GPS) just months in.
• Aimed at driving continuous improvement, enterprise-wide efficiency, and a growth mindset. 700+ continuous improvement initiatives completed YTD 2026, 200+ in flight, and ~350 more planned, following the 10 President’s Kaizen events that kicked off the year, with focus on cash flow, service reliability, and speed to market.
• GPS is the new permanent operating system for the enterprise, with management layers removed, P&L responsibility pushed directly to segment leaders, and rigorous KPI frameworks embedded throughout the organization.

Hillrom + Deleveraging

• Acquired Hillrom in December 2021 for $10.5B equity / $12.5B enterprise — the largest deal in Baxter’s history. Expanded into connected care (beds, patient monitoring, digital tools).
• A $3.1B goodwill impairment in 2022 confirmed the overpay (~20x EBITDA for a $3B revenue company). Debt ballooned to $17B against $2.9B in cash, with leverage going from <1x to nearly 5x just as rates soared.
• Responded with aggressive divestitures: sold BioPharma Solutions for $4.25B (2023) and Vantive (Kidney Care) for $3.8B to Carlyle (2024). The kidney segment was the slowest-growing (+1% FY2023) and lowest-margin (6.7% EBIT) — the divestiture removed a structural drag.
• Net debt reduced from ~$15B (2023) to ~$6.6B as of Q3 2026, down from ~$7.5B at year-end 2025.
• Net leverage on track for ~3x by end of 2026. Cash: $1.98B vs. $8.6B in total debt ($7.76B long-term plus $844M current maturities).
• Potential for smaller divestitures/portfolio pruning in 2026 to support further deleveraging.
• Completed a $600M cash tender offer in Q3 2026, retiring $864M of debt at ~69 cents on the dollar.
• Dividend cut to $0.01/quarter (Q4 2025) frees >$300M in annual cash flow for debt paydown. Interest expense savings from $439M (2023) to $210-220M (2025) — a ~$0.44/share benefit.
• FY2026 net interest and other expense now guided to $245-255M, lowered from $260-280M following the tender.
• Solvency risk is off the table. The balance sheet is positioned for future flexibility and eventual buybacks.

IV Fluids Disruption: Hurricane Helene

• Hurricane Helene (September 2024) flooded the North Cove, NC plant, which supplied ~60% of U.S. IV fluids. Production halted, triggering a national shortage.
• Full recovery reached by May 2025 — pre-hurricane production levels restored and allocations removed for nearly all IV codes.
• Hospitals had conserved and rationed during the disruption, and volumes remain ~10-15% below the pre-hurricane baseline. Management is treating current demand as the new baseline and right-sizing the labor and support footprint accordingly. IV Solutions returned to growth in Q3 2026 off the new lower baseline.
• This mirrors the Hurricane Maria playbook (~2-year normalization).

Novum IQ Pump

• Novum IQ is the first new large-volume infusion pump in ~30 years. Had strong early momentum — drove 50% infusion growth in 2024, gained +200 bps of share, and converted major accounts.
• Ship and installation hold expected to remain in place through full-year 2026. Field-action corrections have now been identified and are in early verification testing, a step forward from Q1, pending regulatory submissions. Management reported continued progress with regulators in Q3.
• No material impact from customer returns in Q1 or Q2 2026.
• Exposure is limited (~2% of revenue for the total pump portfolio including Spectrum). Spectrum demand remains strong in the meantime, with Infusion Systems growth in Q3 driven by Spectrum IQ.

Margin Recovery

• Adjusted operating margin fell from 18.8% (FY2021) to a 13.9% trough (FY2024). The culprit: fixed-price GPO contracts with no price escalators got crushed by inflation, supply disruptions, and low volumes.
• Recovery underway — 14.1% for FY2025. Q1 2026 adjusted operating margin came in at 11.0% (-390 bps Y/Y), weighed down by an expected unfavorable prior-year comp, tariffs, and elevated manufacturing costs including lower absorption.
• Q2 2026 adjusted operating margin recovered to 14.2% (-90 bps Y/Y), with gross margin 38.6% (-210 bps), bringing 1H 2026 adjusted operating margin to 12.7%.
• Q3 2026 adjusted operating margin of 14.5% (-40 bps Y/Y), with gross margin 38.3% (-110 bps) on mix and a lower pricing contribution, bringing YTD adjusted operating margin to 13.3%. HST segment margin expanded 140 bps to 17.2%.
• FY2026 guide reiterated at 13-14%, implying ~500 bps of expansion from the first half to the second half, with the bridge broken down as: volume-driven operating leverage (~250 bps), largely complete cost structure actions (~125 bps), and rolling through higher-cost inventory produced in the second half of 2025 (~125 bps). That higher-cost inventory has now fully cycled through, with Q3 delivering the expected step-up and Q4 expected at a similar level.
• Two GPO contracts reset in early 2025 (+100 bps pricing benefit), with a third reset in 2026 that impacts 2027.
• Upside drivers: stranded kidney-care costs rolling off (~250 bps uplift as production winds down through 2027), GPS-driven continuous improvement, and stabilized input costs.
• Path to historical high-teens (18%+) over the forecast period; normalized mid-to-high teens by 2028-2029.
• Potential for structurally higher margins over time without the drag of the low-margin kidney-care segment.

Return to Growth

• Stabilizing post-transformation. FY2025 operational sales +3% (reported +6%).
• Q3 2026 revenue $2.98B (+5% reported and organic), beating consensus of $2.91B by ~$66M. U.S. sales ~$1.6B (+3% reported, +5% organic); international ~$1.4B (+7% reported, +6% organic). Growth across every segment and division, a second straight quarter of ~5% organic growth after Q1’s -1%, led by Advanced Surgery (+12%), Drug Compounding (+9%), and Infusion Systems.
• End markets growing low single digits; goal is to outperform at mid-single digits long-term.
• Innovation cadence building, with new product launches including Connex 360, the Dynamo smart stretcher, the IV Verify Line Labeling System, the XR spine surgical table, Purview infusion benchmarking (built into the IQX platform), and BEST APX Acute Care airway clearance, with Dynamo now launched internationally in Canada.
• Hider has described the strategy as base hits rather than walk-off grand slams, with a consistent cadence of customer-driven products designed to expand value over time.
• Next catalyst: 2027 guidance on the Q4 call in February, followed by the 2027 investor day, where management is expected to lay out a roadmap with long-term growth targets.
• FDA warning letter (Oct. 20) on the Round Lake, IL plant, Baxter’s only U.S. pharma facility, citing four findings: antibiotic cross-contamination, sterility controls, particulate inspection, and investigations.
• Announced it will discontinue cephalosporin production at Round Lake effective the end of October (supporting contracted customers into 2027), repositioning the site exclusively for non-ceph production and helping address complexities cited in the warning letter. Ceph products contribute ~$50M in sales and ~$30M in operating income in 2026.

Key Financials + Valuation

• FY2025: revenue $11.24B (+6% reported, +3% operational). Adjusted EPS $2.27 (+20% Y/Y). Adjusted operating margin 14.1% (+20 bps). FCF $438M (+17% Y/Y).
• Q3 2026 adjusted EPS $0.58 (-16% Y/Y on a higher tax rate vs. prior-year discrete tax benefits), beat consensus $0.52 by ~12%.
• Q3 2026 FCF $448M on capex of $110M. YTD FCF $705M vs. an ($18M) outflow prior year, already ~61% above FY25’s $438M base, with Q4 seasonally the strongest cash quarter ($456M in Q4 2025).
• Deleveraging remains the primary use of cash, targeting ~3x net leverage by year-end 2026.
• FY2026 guidance raised again: reported sales +4-5% (from +3-4%), organic +3-4% (from +2-3%). Adjusted EPS $2.05-$2.15 (from $1.95-$2.15; new midpoint $2.10). Adjusted operating margin held at 13-14%.
• By segment: MPT low-to-mid-single-digit growth (raised from low single digits); HST low-single-digit growth. Pharma no longer broken out as a standalone segment.
• Initial 2027 read: headwinds from stepped-up inflation, no repeat of the 2026 tariff refund, stranded costs once the Vantive TSA concludes at the end of January, and the ceph and Front Line Care product exits, offset by a growing pipeline of efficiency savings.
• Normalized earnings power: ~$3.50/share long-term.
• Trading at ~11.5x forward earnings vs ~18x historical average.
• Trades like it’s been taken out on a stretcher despite deleveraging progress, a new CEO, and a clear margin recovery path.

Q3 Earnings Breakdown

10 Key Points

1) Revenue of $2.98B (+5% reported, +5% organic) came in ahead of consensus of $2.91B, with growth across every segment and division in both the U.S. and international markets. U.S. sales of $1.6B grew 3% reported and 5% organic, while international sales of $1.4B rose 7% reported and 6% organic. Advanced Surgery, Drug Compounding, and Infusion Systems were the largest contributors, with end-market demand holding steady. This was the second straight quarter of ~5% organic growth following Q1’s (1%) decline.

2) Adjusted EPS of $0.58 (-15.9% Y/Y) came in ahead of consensus of $0.52. The decline was expected and came entirely from taxes. The adjusted tax rate was 18.3% vs. 5.1% a year ago, when reserve releases, withholding taxes, and other discrete benefits lowered the prior-year rate.

3) Adjusted gross margin of 38.3% (-110 bps) brought YTD gross margin to 37.9% (-270 bps), with Y/Y compression narrowing from Q2’s -210 bps. The pressure came from mix, with strong growth in lower-margin Drug Compounding and Global Surgical Solutions alongside lower sales of higher-margin injectables. A smaller pricing contribution also weighed as Baxter lapped two GPO renewals that benefited the prior-year period. By segment, MPT gross margin came in at 37.1% (-90 bps), with HST at 44.8% (-160 bps). The higher-cost inventory that weighed on the first half has now fully cycled through.

4) Adjusted operating margin of 14.5% (-40 bps) came on adjusted operating income of $432.0M (+2.1% Y/Y), ~$29M ahead of consensus of $402.9M. That brings YTD adjusted operating margin to 13.3% (-170 bps). Cost actions, now contributing for a full quarter, mostly offset gross margin pressure. Adjusted SG&A of $637M (21.4% of sales) improved 80 bps, with adjusted R&D steady at 4.0% of sales. The quarter delivered the expected second-half step-up from 11.0% in Q1 and 14.2% in Q2, with management expecting Q4 operating margin to be in line with Q3 and holding full-year guidance at 13% to 14%.

5) Medical Products & Therapies revenue of $2.10B grew 6% on both a reported and organic basis. Segment operating income was $439M (+7%), with adjusted operating margin of 20.9% (+10 bps). Infusion Therapies & Platforms posted $1.76B (+4% organic), driven by Infusion Systems, led by Spectrum IQ, Drug Compounding (+9%) on strong international demand, and IV Solutions, which grew off the new lower demand baseline. Injectables declined 3% due to price deflation and manufacturing challenges at Round Lake, partially offsetting that growth. Advanced Surgery grew 12% to $342M, driven by hemostat and sealant volumes and strong commercial execution. A competitor’s supply disruption also benefited Advanced Surgery, making comps tougher going forward. On Novum IQ, the LVP continues to make progress with regulators, with an update to come when available. In the meantime, the broader pump portfolio of Spectrum LVP, Novum syringe, and the IQX software platform is driving Infusion Systems growth.

6) Healthcare Systems & Technologies revenue of $806M grew 4% on both a reported and organic basis. Segment operating income was $139M (+14%), with adjusted operating margin of 17.2% (+140 bps) on cost actions and higher volumes, partially offset by mix. Care & Connectivity Solutions grew 5% to $498M on Global Surgical Solutions and Patient Support Systems, continued execution against the U.S. backlog, and international strength. Front Line Care grew 3% to $308M on connected monitoring led by Connex 360, partially offset by planned global product exits. Management has still not seen any change in U.S. hospital capital spending, with the order book reflecting solid demand.

7) Following the FDA warning letter, Baxter announced it will discontinue cephalosporin production at its Round Lake specialty injectables facility effective the end of October, while continuing to support customers under contract into 2027. The move repositions the site exclusively for non-ceph production, simplifying operations, supporting supply continuity, and addressing some of the complexities cited in the letter. Corrective and preventive actions are already underway across the site and broader network. Ceph products are expected to contribute ~$50M in sales and ~$30M in operating income in 2026, which management called a net headwind for 2027, partially mitigated by inventory sell-through and alternative products. Baxter recorded $39M of related restructuring costs in the quarter, excluded from adjusted results.

8) Free cash flow of $448M rose ~255.6% Y/Y from $126M, bringing YTD FCF to $705M from a ($18M) outflow in the prior-year period. That is already 61.0% above the $438M generated in all of FY25, with Q4 still ahead as the seasonally strongest cash quarter ($456M last year). The improvement came from better operational performance and working capital discipline, helped by the timing of cash receipts, including the IEEPA tariff refund recognized in Q2 and proceeds from a legal settlement. Baxter also completed a $600M cash tender offer in September, retiring $864M of debt and bringing net debt to ~$6.6B from ~$7.5B at year-end 2025, leaving management confident in reaching ~3.0x net leverage by year-end. Once that target is reached, capital allocation opens up to internal investment, tuck-in M&A, and opportunistic buybacks, with Hider naming cardiac monitoring and Advanced Surgery as areas of interest.

9) Baxter GPS continues to embed itself across the organization, with more than 700 continuous improvement initiatives completed YTD, 200+ in flight, and ~350 more planned. Front Line Care improved blood pressure cuff manufacturing cycle times by more than 10%, adding capacity without additional capital, while global services cut alternative shipment backorders by more than 50% in certain areas of the business. CCS on-time shipments also improved 8% Y/Y, with the Advanced Surgery quality measure up nearly 20%. New CFO John Rogers, who joined October 1, said GPS is already deeply embedded, though he sees remaining complexity in areas like IT and finance as the basis for a sustainable pipeline of efficiency savings over the next three years.

10) Management raised its full-year outlook for the second straight quarter, now expecting organic sales growth of 3% to 4% (from 2% to 3%) and reported growth of 4% to 5% (from 3% to 4%), implying ~5% organic growth in Q4. Adjusted EPS guidance moves to $2.05 to $2.15 (from $1.95 to $2.15), lifting the midpoint to $2.10, with MPT raised to low-to-mid-single-digit organic growth (from low single digits) and HST held at low single digits. Adjusted operating margin guidance was held at 13% to 14% and the tax rate at 18.5% to 19.5%, while interest and other expense guidance was lowered to $245M to $255M (from $260M to $280M) following the tender. Ahead of full guidance in February, management also gave an initial read on 2027, laying out several headwinds: stepped-up inflation led by salaries, electronics, and materials; no repeat of this year’s tariff refund, with Section 232 clarity expected in Q4; stranded costs once the Vantive TSA ends in January; and the ceph and Front Line Care product exits. New CFO John Rogers balanced that with a growing pipeline of savings and a goal of fully offsetting inflation through efficiency gains.

Earnings Call Highlights

Morningstar Analyst Note

General Market

The CNN “Fear and Greed Index” ticked down to 26 this week from 35 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked down to 76.84% equity exposure this week from 87.69% last week.

Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week.  Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.

Larger accounts $5–10M+ can access bespoke service anytime here.

Not a solicitation.

*Opinion, Not Advice. See Terms

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Article referenced in VideoCast above:

“Checkout the Comeback” Stock Market (and Sentiment Results)…

Key Takeaways – Episode 367

A detailed summary of this week’s videocast with Tom Hayes, covering the portfolio walkthrough, stock ideas, positioning, and market sentiment.

Executive summary

Tom framed the week around a rotation he says is now visible in the data. With Alphabet and Meta posting negative free cash flow and the AI buildout shifting from debt to equity funding, money has moved out of tech and into consumer staples, healthcare, small caps, and international markets. The ISM has printed above 50 for nine straight months with rail volumes pointing to a tenth, which Tom reads as support for the small over large, value over growth, and international over domestic themes he has pushed for months.

On AI, Tom is not arguing against the theme. His point is the price paid for it: Intel was sold at $96–97 and fell ~20% after hours on earnings to ~$70, while Amazon in 2000 was a great business that still took 10 to 12 years to regain its high. He would avoid the semiconductor and memory bounce, expects the sell side to promote the narrative ahead of Anthropic’s IPO, and sees record equity supply coming from Meta, SpaceX, and Anthropic. PayPal and Etsy, by contrast, delivered strong Q3 reports with guidance raised, while VF Corp’s CEO described his business as accelerating.

“The key is how much are you getting paid for as if it already happened.”

Tom Hayes, on paying for the theme

Tom does not trade geopolitical or election guesses. His answer on Iran and the timing of oil spikes was to underwrite each company on a 36-month view. He said he would only buy a business he would be willing to own outright with debt financing and his entire net worth. He expects Republicans to lose the House, reads the bond market as pricing in checks and balances, and continues to buy the 10-year Treasury after it fell back below 5% from 5.30%.

Market sentiment and macro view

Rotation and the goods economy

• ISM manufacturing printed above 50 for nine straight months from January through September, with July’s 55.6 the highest reading since May 2022 after one of the longest contractions in the index’s history.
• U.S. rail volume swung from declines in late 2025 to steady growth since February, with the first two weeks of October up 7.8% year over year. Rail runs weeks ahead of the ISM, which reports October on November 2. Tom expects a tenth straight expansion print, since rail growth near 8% has lined up with mid-50s readings.
• Calendar-year rail growth and S&P earnings growth show a 0.86 correlation since 2010, with each point of rail growth coinciding with 2.8 points of EPS growth. Since 1979 the ISM has been the macro indicator most correlated with small-cap performance relative to large caps.
• October was a sharp rotation: consumer staples led at +8.48% while dividend payers and low-volatility stocks outperformed. Pure growth and momentum lagged, leaving a ~15-point spread between staples and growth (down 7%).
• Healthcare has been the best-performing S&P sector since late April, outperforming the index by more than 22 percentage points over 100 trading sessions, the strongest relative run since 2001 (per Seth Golden). Healthcare had underperformed tech by the widest margin in 27 years. Tom likes healthcare over tech here.

Rates, the midterms, and oil

• The 10-year yield reached 5.30% and is back below 5%. Tom continues to buy the 10-year, noting that long-run Treasury returns are the worst in a century and that the last comparable entry points were 1959 and 1981. He expects yields to move lower over time.
• Tom expects Republicans to lose the House and says the Senate is unknown, adding that this reflects the polls and not his politics. He cites gas near $7 a gallon in California and $5–6 elsewhere. He reads the bond rally as the market pricing in checks and balances, which would mean less spending and lower yields on a relative basis.
• Oil is above $100 and Tom sees a spike back to $150 as possible. On whether Trump is waiting until after the election to act on Iran, he called any spike temporary regardless of timing. Guessing the timing, he said, has no bearing on buying good businesses at great prices over a 3 to 5 year view.
• The S&P has risen from every midterm trough through June since 1950, and stocks have a habit of rallying after midterms. This year has been off the normal pattern, with the indices holding up while ~90% of the market bottomed in October. Tom expects the rotation to persist through year-end but cautions that the indices may lag, since the stocks rallying carry smaller index weights.
• Tom sees the recent dollar breakout as a fake-out and expects the dollar to trend lower over the next couple of years. China’s national-team ETF buying is at its highest since April 2025, with international buying resuming in mid-October.

AI cycle read

• Tom remains bullish on AI as a theme. His point is price: Amazon in 2000 became far more than anyone imagined, yet the stock fell ~90% over the next few years while revenue and cash flow grew. It took 10 to 12 years to regain its high. He applied the same logic to selling Intel at $96–97.
• Alphabet posted a second straight quarter of negative free cash flow and Meta its first in over 10 years. Meta fell 6.1% last week after earnings. Amazon was down ~5–6% after hours on higher spending.
• Meta’s 10-Q says recent large capital raises at Alphabet, SpaceX, Anthropic, and OpenAI have made raising capital increasingly challenging. Tom reads this as the funding environment turning from debt to equity: with cash flow turning negative, new equity shrinks each shareholder’s slice of a pie that is flat or shrinking.
• Hyperscaler investment growth appears to peak in Q4 2026, with consensus estimates falling over the following four quarters. Tom notes that the market is a discounting mechanism, so the stocks that rose on the buildout should reflect that.
• Apollo’s Torsten Slok sees no AI payoff outside tech: revenue per worker and margins are rising for the Mag 7 and flat for the S&P 493. Tom adds that Main Street companies are moving to open-weight models, which he sees as negative for Anthropic and OpenAI.
• Several tech names remain in bear markets after the bounce, including AppLovin (down 65%), CoreWeave (down 57%), Oracle (down 50%), and Arm (down 49%). AI’s six-month edge over non-AI stocks is at its weakest of this bull market.

Positioning and sentiment

• Fear & Greed is at 35. Tom expects much of the caution to unravel after the election as investors get comfortable buying the 493.
• Tom expects Q4 to be the first quarter in which S&P 493 earnings growth (~30%) outpaces the hyperscalers (~23%).
• Reported earnings growth is running at 29.5%, which Tom reads as the peak growth rate, similar to 2021. Data this week was solid: GDP of 3.4% was a little better than expected, jobless claims were lower than expected, and consumer confidence and new home sales came in better.
• Equity supply is at its highest on record, with Meta raising up to ~$95B, SpaceX up to $100B, and Anthropic’s IPO next. The 20 largest IPOs since 2010 averaged a 60% maximum drawdown in their first 12 months. Tom expects Anthropic to be no different.
• Crowded hedge fund positions saw a sharp unwind this week. Tom also noted record weekly inflows into a leveraged semiconductor ETF in October, with the 3x bull fund struggling at the same time.

Long ideas — rotation, cash machines, and turnarounds

Names Tom walked through as current portfolio holdings or ideas he actively endorsed on the episode. Prices and levels are as cited on air.

Avoid, trim, or pass

Names and risk signals Tom flagged this week. Where a name is listed as a pass, he is declining to allocate capital.

Portfolio moves

• Alibaba. Tom has been buying and will buy below $110 as new money comes in.
• Range Resources. The portfolio holding was taken out at ~$53–54, against Tom’s $60 proved-plus-unproved estimate at initiation. He says the deal stole ~$7 of upside, though he calls it a fine result for a ~10x over 10 years.
• Baxter. Tom called the pullback after a rip off the lows an opportunity.
• Underwriting discipline. Tom buys only what he would buy outright with 100% debt financing against his entire net worth. He says that if the market closed for three years with no price quotes, the portfolio would be up double.

Media appearances

Fox Business — with Stuart Varney on Varney & Co.

• Tom wants to see return on invested capital from big tech, not just spending, with ~$735B planned this year. He cited expected cloud growth of 45% at Azure, 38% at AWS, and 82% at Google Cloud, and thinks the stocks will be okay if that shows up and the market could bounce.
• Q4 is the first quarter in which S&P 493 earnings growth is expected to outpace the Mag 7, ~30% vs. ~23%. Tom suggests getting into the cheaper names before everyone else.
• Tom would avoid beaten-down AI infrastructure such as semiconductors and memory. They could see a dead-cat bounce, but they ran 3 to 10x and the trade is crowded with deleveraging.

EWTN — with Veronica Dudo on the Anthropic IPO

• The offering could be the largest in history, with a raise of up to $100B at a $1.5–2T valuation. Revenue is up 14x year over year with $16.3B in the first half of this year.
• Tom thinks Anthropic wants to get out while timing favors it, with open-weight models from China and the U.S. cheaper to run and ~96–98% as efficient for most tasks.
• He expects regulation to accelerate after a big event. He cited S-1 language on catastrophic or existential risk and a statement that no insurer, maybe not the whole insurance industry, can cover a catastrophic AI incident. AI will also be used by bad actors.
• On market impact, Tom pointed to heavy supply (debt competing with Treasuries, Meta’s equity raise of up to $95B, and SpaceX’s up to $100B) and expects selling from AI infrastructure and hyperscalers to fund purchases if Anthropic prices before Thanksgiving.

Reuters: Tom was quoted by Lewis Krauskopf and Sudeshna Ghoshal in an article on Anthropic’s IPO.

What to watch

Opinion only for Informational/Educational purposes only. Not investment Advice. Not a solicitation to buy or sell securities. Read full terms at HedgeFundTips.com under “Terms” link.

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Article referenced in Podcast above:

“Checkout the Comeback” Stock Market (and Sentiment Results)…

Key Takeaways – Episode 367

A detailed summary of this week’s videocast with Tom Hayes, covering the portfolio walkthrough, stock ideas, positioning, and market sentiment.

Executive summary

Tom framed the week around a rotation he says is now visible in the data. With Alphabet and Meta posting negative free cash flow and the AI buildout shifting from debt to equity funding, money has moved out of tech and into consumer staples, healthcare, small caps, and international markets. The ISM has printed above 50 for nine straight months with rail volumes pointing to a tenth, which Tom reads as support for the small over large, value over growth, and international over domestic themes he has pushed for months.

On AI, Tom is not arguing against the theme. His point is the price paid for it: Intel was sold at $96–97 and fell ~20% after hours on earnings to ~$70, while Amazon in 2000 was a great business that still took 10 to 12 years to regain its high. He would avoid the semiconductor and memory bounce, expects the sell side to promote the narrative ahead of Anthropic’s IPO, and sees record equity supply coming from Meta, SpaceX, and Anthropic. PayPal and Etsy, by contrast, delivered strong Q3 reports with guidance raised, while VF Corp’s CEO described his business as accelerating.

“The key is how much are you getting paid for as if it already happened.”

Tom Hayes, on paying for the theme

Tom does not trade geopolitical or election guesses. His answer on Iran and the timing of oil spikes was to underwrite each company on a 36-month view. He said he would only buy a business he would be willing to own outright with debt financing and his entire net worth. He expects Republicans to lose the House, reads the bond market as pricing in checks and balances, and continues to buy the 10-year Treasury after it fell back below 5% from 5.30%.

Market sentiment and macro view

Rotation and the goods economy

• ISM manufacturing printed above 50 for nine straight months from January through September, with July’s 55.6 the highest reading since May 2022 after one of the longest contractions in the index’s history.
• U.S. rail volume swung from declines in late 2025 to steady growth since February, with the first two weeks of October up 7.8% year over year. Rail runs weeks ahead of the ISM, which reports October on November 2. Tom expects a tenth straight expansion print, since rail growth near 8% has lined up with mid-50s readings.
• Calendar-year rail growth and S&P earnings growth show a 0.86 correlation since 2010, with each point of rail growth coinciding with 2.8 points of EPS growth. Since 1979 the ISM has been the macro indicator most correlated with small-cap performance relative to large caps.
• October was a sharp rotation: consumer staples led at +8.48% while dividend payers and low-volatility stocks outperformed. Pure growth and momentum lagged, leaving a ~15-point spread between staples and growth (down 7%).
• Healthcare has been the best-performing S&P sector since late April, outperforming the index by more than 22 percentage points over 100 trading sessions, the strongest relative run since 2001 (per Seth Golden). Healthcare had underperformed tech by the widest margin in 27 years. Tom likes healthcare over tech here.

Rates, the midterms, and oil

• The 10-year yield reached 5.30% and is back below 5%. Tom continues to buy the 10-year, noting that long-run Treasury returns are the worst in a century and that the last comparable entry points were 1959 and 1981. He expects yields to move lower over time.
• Tom expects Republicans to lose the House and says the Senate is unknown, adding that this reflects the polls and not his politics. He cites gas near $7 a gallon in California and $5–6 elsewhere. He reads the bond rally as the market pricing in checks and balances, which would mean less spending and lower yields on a relative basis.
• Oil is above $100 and Tom sees a spike back to $150 as possible. On whether Trump is waiting until after the election to act on Iran, he called any spike temporary regardless of timing. Guessing the timing, he said, has no bearing on buying good businesses at great prices over a 3 to 5 year view.
• The S&P has risen from every midterm trough through June since 1950, and stocks have a habit of rallying after midterms. This year has been off the normal pattern, with the indices holding up while ~90% of the market bottomed in October. Tom expects the rotation to persist through year-end but cautions that the indices may lag, since the stocks rallying carry smaller index weights.
• Tom sees the recent dollar breakout as a fake-out and expects the dollar to trend lower over the next couple of years. China’s national-team ETF buying is at its highest since April 2025, with international buying resuming in mid-October.

AI cycle read

• Tom remains bullish on AI as a theme. His point is price: Amazon in 2000 became far more than anyone imagined, yet the stock fell ~90% over the next few years while revenue and cash flow grew. It took 10 to 12 years to regain its high. He applied the same logic to selling Intel at $96–97.
• Alphabet posted a second straight quarter of negative free cash flow and Meta its first in over 10 years. Meta fell 6.1% last week after earnings. Amazon was down ~5–6% after hours on higher spending.
• Meta’s 10-Q says recent large capital raises at Alphabet, SpaceX, Anthropic, and OpenAI have made raising capital increasingly challenging. Tom reads this as the funding environment turning from debt to equity: with cash flow turning negative, new equity shrinks each shareholder’s slice of a pie that is flat or shrinking.
• Hyperscaler investment growth appears to peak in Q4 2026, with consensus estimates falling over the following four quarters. Tom notes that the market is a discounting mechanism, so the stocks that rose on the buildout should reflect that.
• Apollo’s Torsten Slok sees no AI payoff outside tech: revenue per worker and margins are rising for the Mag 7 and flat for the S&P 493. Tom adds that Main Street companies are moving to open-weight models, which he sees as negative for Anthropic and OpenAI.
• Several tech names remain in bear markets after the bounce, including AppLovin (down 65%), CoreWeave (down 57%), Oracle (down 50%), and Arm (down 49%). AI’s six-month edge over non-AI stocks is at its weakest of this bull market.

Positioning and sentiment

• Fear & Greed is at 35. Tom expects much of the caution to unravel after the election as investors get comfortable buying the 493.
• Tom expects Q4 to be the first quarter in which S&P 493 earnings growth (~30%) outpaces the hyperscalers (~23%).
• Reported earnings growth is running at 29.5%, which Tom reads as the peak growth rate, similar to 2021. Data this week was solid: GDP of 3.4% was a little better than expected, jobless claims were lower than expected, and consumer confidence and new home sales came in better.
• Equity supply is at its highest on record, with Meta raising up to ~$95B, SpaceX up to $100B, and Anthropic’s IPO next. The 20 largest IPOs since 2010 averaged a 60% maximum drawdown in their first 12 months. Tom expects Anthropic to be no different.
• Crowded hedge fund positions saw a sharp unwind this week. Tom also noted record weekly inflows into a leveraged semiconductor ETF in October, with the 3x bull fund struggling at the same time.

Long ideas — rotation, cash machines, and turnarounds

Names Tom walked through as current portfolio holdings or ideas he actively endorsed on the episode. Prices and levels are as cited on air.

Avoid, trim, or pass

Names and risk signals Tom flagged this week. Where a name is listed as a pass, he is declining to allocate capital.

Portfolio moves

• Alibaba. Tom has been buying and will buy below $110 as new money comes in.
• Range Resources. The portfolio holding was taken out at ~$53–54, against Tom’s $60 proved-plus-unproved estimate at initiation. He says the deal stole ~$7 of upside, though he calls it a fine result for a ~10x over 10 years.
• Baxter. Tom called the pullback after a rip off the lows an opportunity.
• Underwriting discipline. Tom buys only what he would buy outright with 100% debt financing against his entire net worth. He says that if the market closed for three years with no price quotes, the portfolio would be up double.

Media appearances

Fox Business — with Stuart Varney on Varney & Co.

• Tom wants to see return on invested capital from big tech, not just spending, with ~$735B planned this year. He cited expected cloud growth of 45% at Azure, 38% at AWS, and 82% at Google Cloud, and thinks the stocks will be okay if that shows up and the market could bounce.
• Q4 is the first quarter in which S&P 493 earnings growth is expected to outpace the Mag 7, ~30% vs. ~23%. Tom suggests getting into the cheaper names before everyone else.
• Tom would avoid beaten-down AI infrastructure such as semiconductors and memory. They could see a dead-cat bounce, but they ran 3 to 10x and the trade is crowded with deleveraging.

EWTN — with Veronica Dudo on the Anthropic IPO

• The offering could be the largest in history, with a raise of up to $100B at a $1.5–2T valuation. Revenue is up 14x year over year with $16.3B in the first half of this year.
• Tom thinks Anthropic wants to get out while timing favors it, with open-weight models from China and the U.S. cheaper to run and ~96–98% as efficient for most tasks.
• He expects regulation to accelerate after a big event. He cited S-1 language on catastrophic or existential risk and a statement that no insurer, maybe not the whole insurance industry, can cover a catastrophic AI incident. AI will also be used by bad actors.
• On market impact, Tom pointed to heavy supply (debt competing with Treasuries, Meta’s equity raise of up to $95B, and SpaceX’s up to $100B) and expects selling from AI infrastructure and hyperscalers to fund purchases if Anthropic prices before Thanksgiving.

Reuters: Tom was quoted by Lewis Krauskopf and Sudeshna Ghoshal in an article on Anthropic’s IPO.

What to watch

Opinion only for Informational/Educational purposes only. Not investment Advice. Not a solicitation to buy or sell securities. Read full terms at HedgeFundTips.com under “Terms” link.

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On Monday, I joined the great Stuart Varney on Fox Business’ Varney & Co. to discuss markets, the economy, tech, hyperscalers, AI, rotation, and a lot more. Thanks to Stuart and Nick Palazzo for having me on:

Watch in HD Directly on Fox Business

On Monday, I joined Veronica Dudo on EWTN to discuss markets, Anthropic ($ANT), IPOs, AI, SpaceX ($SPCX), Meta ($META), and more. Thanks to Veronica and Sarah Davies for having me on:

PayPal Update

For newer readers, here’s a brief overview of the key drivers behind our PayPal thesis, an overlooked global payments leader with a cash machine core business funding aggressive buybacks and a long list of growth catalysts hiding in plain sight:

Company Overview

• Founded in 1998. Headquartered in San Jose, CA. A global two-sided payments network connecting 440M active consumer accounts with millions of merchants across 200+ markets.
• PayPal and Venmo are the #1 and #2 most popular mobile payment apps in the U.S. One of only four globally recognized payment networks alongside Visa, Mastercard, and American Express.
• $1.79T in Total Payment Volume in 2025 (+7% Y/Y); 25.4B transactions processed. ~90% of revenue from transaction fees; ~10% from value-added services.
• TPV mix: 63% U.S., 37% international. ~90% penetration of Fortune 500 companies. Active accounts: 439M (55% U.S., 45% international).
• New organizational structure: three business units — Checkout Solutions and PayPal; Consumer Financial Services and Venmo; and Payment Services and Braintree. Each with a single leader.
• Medium-term framework: sustainable mid-single-digit TM$ growth plus operating leverage and buybacks driving solid double-digit EPS growth, without requiring branded checkout to return to historical growth rates.
• Financial services, Venmo, and PSP each expected to grow double digits and contribute a significantly greater share of TM$ growth.
• Stock down 82% from the 2021 peak (~$308/share) — once the poster child of pandemic-era growth stocks, now left for dead.

Management — CEO Enrique Lores

• Appointed CEO effective March 1, 2026. Brings 30+ years at HP, including 6 years as CEO since 2019. Served on PayPal’s board for 5 years, including ~18 months as Chairman.
• During his HP tenure: stock went from trough ~$10 to peaks of ~$37. HP consistently generated $3-4B in annual FCF and returned 100% to shareholders via dividends and buybacks. Retired 37.5% of HP’s shares outstanding since 2019.
• Built a reputation as a disciplined cost optimizer. Announced major restructuring at HP (4,000-6,000 job cuts, ~10% of workforce) to save ~$1.4B through simplified structure, reduced management layers, and AI-driven automation.
• Compensation heavily incentive-based: baseline bonus requires ~60% stock appreciation (~$83/share); maximum payout requires 150%+ increase and stock at $125+.
• On the portfolio: “At this point, I believe that the best approach is to invest in our 3 core businesses, PayPal, Venmo, and Braintree, to drive profitable growth.”
• Lores added that there are “significant synergies across the three businesses that make them stronger together.”

Cost Savings Plan

• New $1.5B+ gross run-rate savings program, to be executed over the next 2-3 years in three phases: structural simplification and alignment (removing duplication, spans, and layers); operational and portfolio optimization; and accelerated AI/automation deployment across operations.
• Moving faster than planned: year-end exit run-rate target raised to >$700M (from ~$400M identified last quarter).
• Headcount down >2,000 (~8%), managerial roles down >25%, and three organizational layers removed across most of the company.
• AI-assisted coding has already cut implementation time by 25%; AI chat agents now support customer service across 190 countries and 6 languages, resolving 24M+ contacts YTD.
• Savings mix: ~20-30% structural simplification, ~30-40% operational and portfolio optimization, ~40% accelerated AI adoption (~$600M).
• Q3 non-transaction opex grew just 1% to $2.34B (vs. ~$2.42B Street). FY26 non-transaction opex growth outlook lowered to mid-single digits from 7-8%.
• With FY25 non-transaction operating expenses sitting at $9.1B, there’s plenty of low-hanging fruit. Reports point to a ~20% workforce reduction (~4,760 of 23,800 employees).
• Savings will be reinvested in tech modernization, branded checkout, Venmo, and consumer financial services. Segment-level reporting expected sometime next year.

FCF, Buybacks & Dividend

• Q3 adjusted FCF of $2.05B (-10% Y/Y against a strong prior-year comparison), bringing TTM to ~$7.7B and YTD to ~$5.6B. FY26 guide raised to $6.5B+ adjusted FCF (from $6B+, vs. ~$5.84B consensus) — ~14% FCF yield at current prices. Cash machine with 100%+ FCF conversion and growing in line with net income.
• Policy: distribute 70-80% of FCF annually to shareholders. Q3 buybacks of $1.5B (~28M shares at ~$54), with ~$120M in dividends. TTM repurchases of $6.0B (~117M shares), reducing weighted average diluted shares -11% Y/Y.
• Shares outstanding down to 837M from 920M at year-end 2025.
• FY26 guide reiterated at ~$6B in buybacks, equivalent to ~12.8% of the current market cap.
• Total shareholder yield ~13.8% (buyback + dividend).
• Share count down 27.2% over the past 5 years. Currently trading at the same price as 2017 despite $37.7B+ deployed in buybacks since.
• $15.1B cash, equivalents, and investments on balance sheet against $13.5B of debt.
• Quarterly cash dividend ($0.14/share); ~1.0% annual yield.

Ads

• 430M+ users generate 20 trillion trackable customer interactions — a data gold mine. PayPal knows what you actually bought (product, price, size), not just what you searched for.
• Hired Mark Grether (May 2024) to build the ads business from scratch. Previously built Amazon’s ad business ($68.6B/year in 2025) and Uber’s ad business (from ~$141M in 2021 to >$2B in 2025).
• Ad business typically commands 80%+ margins vs. PayPal’s current ~45% transaction margins.
• If PayPal captures just $3-4 in annual ad revenue per user (vs. Uber’s ~$9.6), that equates to $1.2-1.6B in high-margin incremental revenue.

Venmo

• Q3 TPV +14% Y/Y to a record $96.81B (vs. ~11% Street), the eighth consecutive quarter of double-digit growth and a third straight quarter of mid-teens growth. Pay with Venmo TPV +43%.
• $1.7B in revenue in 2025 (+20% Y/Y). On track to surpass its original $2B 2027 revenue target well ahead of schedule.
• 100M+ active accounts; 67M monthly active users growing +7% Y/Y.
• ARPA growing double digits; current ARPA >$25 — still only 20-25% of estimated long-term potential. Management sees a 4-5x ARPA opportunity vs. peers, with ARPA becoming one of the company’s key metrics going forward.
• Only 23% of Venmo customers currently use its financial services. Debit card users generate 5-6x the ARPA of P2P-only users.
• Customers using both Venmo debit and Pay with Venmo generate more than 9x the ARPA of P2P-only users, with that cohort nearly doubling Y/Y in Q3. 64% of Venmo users are mid-to-high income (vs. 62% Apple Pay, 40% Cash App).
• Venmo debit card monthly active accounts +55% to 6.7M, with a record 1.6M first-time users in Q3 and newer cohorts activating the card faster than ever (6x transaction frequency and 3x ARPA for debit card users). App rebuilt in Q2 to improve personalization and product discovery, with a 4x acceleration in feature development (1H’26 vs. 1H’25).
• Relaunched the Venmo credit card with split-purchase rewards, added receipt scanning and splitting for P2P, and broadened Pay with Venmo acceptance into travel, college tuition, and prediction markets.
• Launched co-branded debit cards with Big Ten and Big 12; NIL revenue share payouts now processed via PayPal/Venmo.
• Management called Venmo a key component of the go-forward growth plan, with focus on ARPA expansion through deeper attachment of financial services (debit, credit, savings, investing). “Venmo will be a key component of our growth plans moving forward.” Expects double-digit TPV growth to continue in the coming years.
• Still U.S.-only — international expansion represents a significant untapped long-term opportunity. Venmo is a verb across the U.S.; finally being monetized properly and in very early innings.

Branded Checkout

• Represents ~27% of TPV but contributes 50%+ of profit dollars — highest-margin business. PayPal converts transactions at ~90% vs. the industry average of ~50%.
• 84% branded checkout presence across top 100 U.S. e-commerce merchants and marketplaces.
• Q3 branded checkout TPV +1% FXN (vs. ~2% Street), holding in the 1-2% range for a fourth consecutive quarter. Removal of the EU de minimis exemption created ~70 bps of headwind, offsetting a third straight quarter of U.S. improvement and continued strength in BNPL and Pay with Venmo.
• Branded experiences TPV (online checkout, PayPal/Venmo debit, tap-to-pay) +6% FXN, with U.S. debit TPV +60%+ Y/Y.
• Full-year branded checkout outlook reiterated at low-single-digit growth, with Q4 expected at 1-2% as European headwinds persist.
• Merchant playbook (updated checkout pages, biometrics, vaulted payment methods, upstream BNPL messaging, co-marketing) improving relative share across 11 large merchants representing ~20% of U.S. branded volume.
• Plans to scale the playbook across more U.S. merchants and into Europe in 2027.
• The biggest undertaking of former CEO Alex Chriss’s tenure was the overhaul of legacy branded checkout. Untangling a decade of legacy integrations proved complex and rolled out slower than planned.
• New branded checkout experience rolling out — ~60% of merchants now on the new payment pages. Goal: >80% of global transactions by 2027 (vs. ~30% in early 2025).
• Fastlane boosts merchant conversion rates by 51% and improves checkout speed by 36%. Once scaled, Fastlane positions PayPal to capture pricing power over essentially the entire guest checkout market (~40% of global e-commerce).

Agentic Commerce & AI Partnerships

• Positioned as the default payment infrastructure for AI-driven commerce. First digital wallet integrated into ChatGPT (700M+ weekly users) — PayPal’s 36M merchants can now sell directly within the chat interface.
• Microsoft Copilot integration (launched January 2026): Windows and Office users can shop via Copilot with PayPal handling checkout in the background. Additional partnerships with Perplexity AI and Google Gemini.
• Multi-year partnership with Google: PayPal Enterprise Payments becomes a key payment provider across Google Cloud, Google Ads, and Google Play.
• PayPal World now facilitating ~$200M in TPV between Venmo and PayPal.
• PayPal USD (PYUSD) became the largest federally regulated stablecoin in December 2025; recently expanded to 70 markets globally.
• Partnered with Meta to enable checkout via Muse personal AI agents across PayPal merchants worldwide (Muse hit No. 1 on Apple’s App Store 10 days after launch)
• No meaningful sales volumes expected from agentic commerce until 2028
• AI accelerating tech stack modernization, with work that previously took three to four years now achievable in the next 18 months

Buy Now, Pay Later

• Q3 BNPL TPV +25% (vs. +26% in Q2), with BNPL MAAs +23% and continued share gains, outpacing the market. BNPL TPV exceeded $40B in 2025 — growing 23% Y/Y, outpacing the broader BNPL market.
• Expanding distribution and presentment: Temu launched BNPL in Canada (now 8 markets globally) and Home Depot Canada added upstream presentment. Q3 additions include American Eagle, Aerie, and Dick’s Sporting Goods.
• Financial services (BNPL, credit, debit, merchant lending) expected to exceed 20% of transaction margin dollars in 2026 while growing double digits. Customers using financial services generate 2-5x the ARPA of those who don’t.
• Integrated consumer lending partnership with Amazon in Germany and Austria now launched and off to a strong start.
• Roadmap: broader BNPL products and geographies, cards with built-in BNPL flexibility to extend from online to in-store, and an expanded credit portfolio.
• BNPL users transact ~5x more often than standard checkout customers, with average order value 80%+ higher than a standard checkout transaction.
• Economics on par with or better than pure-play BNPL peers.
• BNPL is becoming a core part of holiday spending: 55% of consumers have used or considered BNPL, and 75% of those consumers plan to use or are considering using BNPL for holiday shopping.
• NRF forecasts November and December retail sales up 4.2% Y/Y to $1.013T, the fastest growth since 2021 (+12.6%); compares with 2025 holiday sales up 3.1% to $972B

Enterprise Payments (Braintree)

• PayPal’s enterprise PSP powering payments for Uber, Airbnb, DoorDash, Target, and others.
• Q3 PSP volume +8% (from +13% in Q2), with Braintree +10% and the segment holding at ~45% of total TPV.
• Previously weighed down by an intentional exit from unprofitable, low-margin volume — a 5-6% revenue headwind that fed the slowing growth narrative.
• That headwind is now fully lapped, with growth driven by profitable front book wins, high retention, and expansion alongside existing merchants. Management’s focus is profitable growth, not simply volume.
• Now contributing meaningfully to TM$ growth following the multi-quarter reset; net processing yield nearly doubled Y/Y. Validates management’s price-to-value strategy — winning volume even after repricing contracts to be more profitable.
• Focus now on lifting attachment of value-added services (payouts, risk as a service, invoicing, merchant lending) and unifying Braintree, PayPal Complete Payments, and Hyperwallet onto a single modernized platform.
• Attach rate rose to 6% from 5% a year ago, with a specialized sales force now being built to drive it.

Key Financials & Valuation

• Q3 revenue $8.58B (+2% Y/Y, +1% FXN), missing consensus ~$8.71B by ~$126M.
• U.S. revenue grew 5% to $5.00B; international revenue down 2% reported (-4% FXN) to $3.58B.
• Q3 adjusted EPS $1.45 (+8% Y/Y), beating consensus ~$1.31 by $0.14.
• Q3 TM$ $3.95B (+2% Y/Y), beating consensus ~$3.89B by ~$60M; ex-interest on customer balances +3% to $3.66B.
• Transaction margin of 46.0%, expanding 3 bps Y/Y (first expansion after four straight quarters of contraction).
• Non-GAAP operating margin 18.8%, +16 bps Y/Y (vs. ~16.3% consensus).
• 2025: revenue $33.2B (+4% Y/Y). Transaction margin dollars $15.5B (+6% Y/Y) — accelerating from +5% in 2024 and following two straight years of declines (-5% in 2023, -3% in 2022). 2025 adjusted EPS $5.31 (+14% Y/Y). Adjusted FCF $6.4B.
• FY26 guidance raised again: non-GAAP EPS ~$5.60 (from ~$5.38), above ~$5.37 consensus; transaction margin dollars ~$15.7B (~1.5% growth, from ~$15.6B). Adjusted FCF raised to $6.5B+; ~$6B in buybacks reiterated. Q4 non-GAAP EPS guided to ~$1.43 (vs. ~$1.34 consensus).
• 2027: targeting non-GAAP EPS growth similar to 2026 despite further TM$ and opex investment, implying ~$5.91 (vs. ~$5.77 consensus). Formal guidance on the Q4 call.
• Trading at ~9.4x 2027 earnings (based on management’s implied ~$5.91) vs. 5-year average of 17x.

Q3 Commentary

For a turnaround that has spent years asking investors for patience, PayPal’s third quarter offered something far more persuasive: progress. While revenue of $8.58B (+2% Y/Y) and total payment volume of $487.1B (+7% FXN) came in a touch light, the rest of the report pointed to a business moving firmly in the right direction. Transaction margin dollars of $3.95B (+2% Y/Y) beat consensus by ~$60M, while disciplined cost control held non-transaction operating expense growth to just 1%. That combination drove adjusted EPS up 8% Y/Y to $1.45, well ahead of the $1.31 consensus, marking a third straight beat under CEO Enrique Lores. Management followed with a second guidance raise in as many quarters, lifting full-year EPS to ~$5.60 from ~$5.38 (+5.5% Y/Y), transaction margin dollars to ~$15.7B from ~$15.6B (+1.5% Y/Y), and adjusted free cash flow to $6.5B+ from $6B+ (+1.4% Y/Y).

Despite the solid progress, many investors remain on the sidelines in “show me” mode after years of false starts, unwilling to commit to the turnaround until they see branded checkout inflect higher.

That focus is understandable. Branded checkout accounts for just ~27% of TPV but generates more than half of PayPal’s profit dollars. With competitors like Apple Pay and others competing for the same checkout real estate, the market has treated the slowdown in PayPal’s core checkout button as the slow melt of the entire business. The problem with that framing is that it is backward-looking, judging PayPal by the company it USED to be rather than the business it is BECOMING.

From day one, CEO Enrique Lores has focused on building a business that is far more than a checkout button, diversifying toward growth drivers that make up a steadily larger share of transaction margin dollars. This quarter was a proof point that the strategy works. Branded checkout grew just 1%, yet PayPal still beat on earnings, grew transaction margin Y/Y for the first time in a year, and raised guidance across the board. The PayPal of the past could never have pulled that off.

The difference is a set of new growth drivers that management expects to each grow double digits and account for a significantly greater share of transaction margin dollar growth over time, starting with financial services. The category spans all three businesses, with offerings that include BNPL, PayPal and Venmo credit and debit cards, and working capital and business loans for merchants. Management expects financial services to account for >20% of transaction margin dollars this year while growing double digits, with good reason to keep pushing.

Customers who use these products generate 3-6x the ARPA of those who don’t, while PayPal can acquire them at minimal cost by selling into its existing base of 440M active accounts. Each product makes a customer more valuable and harder to lose, gradually turning a button people use a few times a month into a platform they engage with every day.

BNPL is the furthest along. Volume topped $40B in 2025 (+23% Y/Y) and has grown in the mid-20s every quarter this year (+23%, +26%, and +25%), consistently outpacing the broader market with unit economics on par with or better than the pure-play competitors. The customers it attracts are among the most valuable PayPal has, transacting ~5x more often than standard checkout users with average order values more than 80% higher. Already live in eight markets globally, management continues to expand its reach, adding Amazon in Germany and Austria, American Eagle, Aerie, and Dick’s Sporting Goods this quarter, with cards that carry BNPL flexibility from online checkout into physical stores coming next.

Venmo monetization is the next major lever. Engagement has never been the issue, with eight straight quarters of double-digit TPV growth (+14% to a record $96.8B in Q3) and more than 100M active accounts. The opportunity now is to convert that engagement into higher revenue and transaction margin dollars as more users adopt Venmo’s growing suite of financial services. Q3 brought further progress, with debit card monthly active accounts jumping 55% to 6.7M, including a record 1.6M first-time users, while Pay with Venmo volume grew 43% as acceptance expanded into travel, college tuition, and prediction markets. A relaunched Venmo credit card adds another product to the lineup, with six more product launches, upgrades, or technology milestones planned through 2H’28 as management works to turn Venmo into an all-in-one money management platform. Just 23% of Venmo users currently use any of its financial services, which is why management sees room to grow ARPA 4-5x from current levels while expecting double-digit TPV growth to continue in the coming years.

The third driver is PSP, led by Braintree. Under former CEO Alex Chriss, PayPal made the tough but necessary decision to “fire” unprofitable enterprise customers by repricing contracts to reflect the value of its services. That reset weighed on reported growth for several quarters and fed the slowing-growth narrative. It was fully lapped last year, and the payoff has shown up in spades since. Braintree volume grew 10% in Q3, its fourth straight quarter of double-digit growth, on profitable new business wins, high retention, and expansion with existing merchants. Most importantly, Braintree has become an important contributor to transaction margin dollar growth. The next leg comes from attaching value-added services such as payouts, risk-as-a-service, and invoicing to those processing relationships, where attach rates rose to 6% from 5% a year ago as PayPal builds a specialized sales force dedicated to pushing them higher.

Over the medium term, management expects these new growth drivers to support sustainable mid-single-digit growth in transaction margin dollars which, combined with operating leverage and buybacks, should translate into solid double-digit EPS growth. Most importantly, management expects to deliver this earnings growth even without a meaningful reacceleration in branded checkout toward its historical mid-single-digit growth rates.

That does not mean we expect branded checkout to stay muted forever. The biggest undertaking of former CEO Alex Chriss’s tenure was overhauling the legacy checkout experience, a project that required untangling more than a decade of integrations and rolled out far slower than planned.

Much like Pat Gelsinger got Intel to the 10-yard line before the board handed the ball to Lip-Bu Tan, Chriss laid the groundwork for the checkout turnaround, leaving Lores to punch it into the end zone. He is doing so with a merchant playbook that pairs the latest checkout experience, including biometrics and vaulted payment methods, with upstream BNPL messaging and co-marketing. The early signs are very encouraging. Across 11 large merchants representing ~20% of U.S. branded volume, PayPal’s branded growth is now keeping pace with or outpacing the merchants’ own U.S. e-commerce growth wherever the playbook has been deployed.

Branded checkout has now held in the 1-2% range for a fourth straight quarter despite ~70 bps of drag from EU tariff impacts tied to the removal of the de minimis exemption. Beneath that 1% headline growth sits a third straight quarter of improvement in the U.S., along with stabilization and slight improvement in Germany, PayPal’s second-largest branded checkout market.

Management plans to bring the playbook to additional U.S. and European merchants in 2027, which it is framing as another investment year as it ramps spending in both transaction margin and operating expenses. With those investments underwritten on a two- to three-year horizon, 2028 is when they should begin to bear fruit. Should PayPal execute as management expects, any meaningful rebound in branded checkout is pure upside nobody is paying for today.

Funding all of that investment while still growing earnings requires a leaner PayPal, which is exactly the job Lores was brought in to do. At HP, he built his reputation by stripping out bloated structures, removing management layers, and simplifying operations. PayPal had plenty of room for similar changes. Earlier this year, management unveiled a $1.5B+ gross run-rate savings target (~16.5% of the 2025 non-transaction operating expense base). It has since raised its year-end exit rate to more than $700M from ~$400M last quarter, having cut more than 2,000 roles (~8% of the workforce), reduced managerial positions by more than 25%, and removed three organizational layers across most of the company. Those efforts helped hold non-transaction operating expense growth to just 1%, lifting adjusted operating margin to 18.8% (+16 bps Y/Y) while allowing PayPal to grow EPS 8% on 2% revenue growth.

That cost program also makes PayPal one of the clearest examples of our AI cost center versus AI beneficiary thesis. While the hyperscalers write ever-larger checks for AI infrastructure, we believe the biggest winners will be the everyday businesses that put those tools to work, capturing the efficiency gains without carrying the capex burden. PayPal is one of those winners, with management expecting ~40% of its targeted savings (~$600M) to come from AI adoption.

That works out to ~$0.70 per share on a pre-tax basis, making PayPal one of the few companies to put a hard number on what AI is worth to the bottom line. The tools are already at work across the business, with AI chat agents resolving more than 24M customer contacts YTD across 190 countries and AI-assisted coding cutting implementation time by 25%. Agentic commerce is the cherry on top, with PayPal becoming the first wallet integrated into ChatGPT, building partnerships spanning Perplexity, Google, and Microsoft, and most recently partnering with Meta to power checkout through its Muse personal AI agents.

Even that leaves out the part of the business we continue to be surprised more investors are not focused on: ads. About two and a half years ago, PayPal hired Mark Grether to build its ads business from scratch. He helped build Amazon’s advertising juggernaut, one of the most profitable businesses in tech, before scaling Uber’s ad business from ~$141M in 2021 to more than $2B in 2025. At PayPal, he now has 440M active accounts and trillions of purchase-level data points to work with. Ads businesses typically command 80%+ margins, compared with PayPal’s ~46% transaction margin, creating the potential for a multi-billion-dollar, high-margin business that almost no one is talking about.

In the meantime, PayPal remains the cash machine it has always been. Adjusted free cash flow reached $2.05B this quarter, with full-year guidance now raised to $6.5B+ (~14% free cash flow yield). With $15.1B of cash and investments against $13.5B of debt, PayPal has the flexibility to buy back stock aggressively when it is actually cheap, unlike many management teams that find their hands tied by leverage when shares are beaten down.

On a TTM basis, the company has returned $6.0B through buybacks, retiring ~117M shares and reducing its weighted average diluted share count by 11% Y/Y, bringing the decline in shares outstanding to 28.8% over the past five years. With ~$6B in repurchases still on track for this year and the stock trading at just ~9.4x management’s 2027 EPS target, few uses of capital can match the return on buying back its own shares. Management is well aware, stating plainly that any acquisition must clear the bar of simply buying back more stock.

The market has made clear it wants to see the button turn before it gives PayPal credit for the turnaround. We think investors are waiting for the wrong signal. The business that will drive PayPal’s next decade of earnings is already taking shape in Venmo, BNPL, Braintree, and financial services, while the company retires 3%+ of its shares every quarter at a single-digit multiple. By the time branded checkout finally gives those on the sidelines the green light they are looking for, we suspect investors will be paying a very different price for it.

Q3 Earnings Breakdown

10 Key Points

1) PayPal reported Q3 revenue of $8.58B (+2% Y/Y, +1% FXN), missing consensus of ~$8.71B by ~$126M. Transaction revenue grew 3% to $7.71B, while other value-added services revenue declined 2% to $873M as lower interest on customer balances more than offset higher credit revenue. By geography, U.S. revenue grew 5% to $5.0B, with international revenue declining 2% on a reported basis and 4% on an FXN basis to $3.58B. Non-GAAP EPS of $1.45 grew 8% Y/Y, beating the ~$1.31 consensus by $0.14 and coming in well ahead of management’s own guidance for a low-single-digit decline.

2) Venmo TPV grew 14% Y/Y to a record $96.81B, ahead of Street expectations of ~11%, marking an eighth consecutive quarter of double-digit growth. Adoption of its monetized products continued to grow, led by a >55% increase in debit card monthly active accounts to 6.7M (including a record 1.6M first-time users) alongside 43% growth in Pay with Venmo TPV. Monthly active accounts using both products nearly doubled Y/Y, while newer cohorts are activating the debit card faster than ever, helping drive double-digit ARPA growth during the quarter. Monetization still has a long runway ahead, as only 23% of Venmo customers currently use its financial services even though debit card users generate 5-6x the ARPA of P2P-only users.

3) Online branded checkout TPV grew 1% FXN, slightly below Street expectations of ~2% and down from 2% in Q2, holding within the 1-2% range for a fourth consecutive quarter. The removal of the EU de minimis tax exemption created ~70 bps of headwind, offsetting a third straight quarter of improvement in the U.S. along with continued strength in BNPL (+25%) and Pay with Venmo (+43%), both of which outpaced the market. Branded experiences TPV, which adds PayPal and Venmo debit and tap-to-pay to online checkout, grew 6% FXN, in line with Q2, supported by U.S. debit TPV growth of more than 60%. Management is seeing early traction from its merchant playbook of updated checkout pages, biometrics, vaulted payment methods, upstream BNPL messaging, and co-marketing, with PayPal improving its relative share across 11 large merchants that make up ~20% of U.S. branded volume. For Q4, it expects branded checkout growth to hold at 1-2% as European headwinds persist.

4) PSP TPV grew 8% FXN, slowing from 13% in Q2, with the segment holding steady at ~45% of total TPV. Braintree TPV grew 10%, down from mid-teens growth last quarter, supported by profitable front-book wins, high retention, and expansion within its existing merchant base as management continues to prioritize profitable growth over volume. That focus has Braintree making an important contribution to TM$ growth, with management now looking to lift yield through higher attachment of value-added services such as payouts, risk as a service, invoicing, and merchant lending. Attach rates rose to 6% from 5% a year ago, with management seeing significant room for further improvement. To drive it, PayPal is building a specialized sales force dedicated solely to selling value-added services, which management expects to support margin expansion over time.

5) Total payment volume reached a record $487.14B (+6% reported, +7% FXN), missing consensus of ~$491.3B by ~$4.2B and slowing from 9% FXN growth in Q2. Venmo led growth at +14%, followed by P2P and other consumer at +10% and PSP at +8%, with branded experiences (+6%) and branded checkout (+1%) trailing, all on an FXN basis. The U.S. continued to drive the business, with TPV up 11% to $316.52B on strength in Braintree, Venmo, and branded experiences. International TPV declined 1% on a reported basis and was flat on an FXN basis at $170.61B, as the EU tariff headwind in branded checkout offset growth in debit.

6) Transaction margin dollars grew 2% Y/Y to $3.95B, beating consensus of ~$3.89B by ~$60M and topping management’s guidance for slightly positive growth. Excluding interest on customer balances, which fell to $289M from $321M, TM$ grew 3% to $3.66B. Venmo, Braintree, and FX favorability drove the growth, more than offsetting continued strategic investments in branded checkout and BNPL habituation. Transaction margin expanded 3 bps Y/Y to 46.0%, its first Y/Y expansion after four straight quarters of contraction. Lower costs helped on both fronts. The transaction expense rate improved 2 bps to 0.87% on favorable mix and partner incentives, while the transaction and credit loss rate fell to 0.08% from 0.11% on lower fraud losses, risk mitigation, and disciplined underwriting.

7) Total active accounts reached 440M, up 0.6% Y/Y and 0.4% (~1.6M) sequentially, returning to growth after slight sequential declines in each of the prior two quarters. Monthly active accounts grew 0.4% to 228M, once again led by Venmo. Engagement continued to improve, with transactions per active account on a TTM basis rising 6% to 60.8 as the prior-year Braintree price-to-value actions continued to annualize. Excluding PSP, TPA grew 6% to 38.4 on sustained Venmo engagement. Total payment transactions grew 7% to 6.80B, as well as 7% to 4.31B excluding PSP.

8) PayPal generated adjusted free cash flow of $2.05B, down 10% Y/Y against a strong prior-year comparison, bringing year-to-date adjusted FCF to ~$5.60B. Management put that cash to work by repurchasing $1.5B of stock during the quarter (~28M shares at an average price of ~$54). That brings TTM buybacks to $6.0B (~117M shares) and reduces the weighted average share count by 11% Y/Y, with shares outstanding falling to 837M from 920M at the end of 2025. PayPal also paid ~$120M in dividends, bringing total capital returns for the quarter to ~$1.6B, while declaring another $0.14 per share. The balance sheet remains rock solid, with $15.1B of cash, equivalents, and investments against $13.5B of debt. Management raised full-year adjusted FCF guidance to $6.5B+ from $6B+ (vs. ~$5.84B consensus), implying a ~14% FCF yield on PayPal’s ~$47B market cap, while reiterating plans for ~$6B of buybacks.

9) PayPal is moving faster than planned on its $1.5B+ gross run-rate cost savings program, raising its year-end exit run-rate target to more than $700M from the ~$400M identified last quarter while remaining on track for at least $1.5B over the next 2-3 years. Headcount is down by more than 2,000 (~8% of the workforce), with managerial roles reduced by more than 25% and three organizational layers removed across most of the company. Those efforts helped hold non-transaction operating expense growth to just 1% at $2.34B (vs. ~$2.42B Street), driving non-GAAP operating income up 3% to $1.61B (vs. ~$1.42B consensus) as operating margin expanded 16 bps to 18.8% (vs. ~16.3% consensus). While cautioning against annualizing Q3’s expense performance as growth investments ramp, management lowered its full-year non-transaction operating expense growth outlook to mid-single digits from 7-8%, with the savings expected to fund those investments while supporting operating leverage over time.

10) Management raised full-year 2026 guidance, lifting transaction margin dollars to ~$15.7B (~1.5% growth) from ~$15.6B. Non-GAAP EPS guidance rose to ~$5.60 (+5.5% Y/Y) from ~$5.38, above the ~$5.37 consensus, with plans for ~$6B of buybacks and ~$1B of capex reiterated. For Q4, management expects low-single-digit FXN revenue growth, slightly positive TM$ growth, and online branded checkout TPV growth of 1-2%, with non-GAAP EPS of ~$1.43 (+16% Y/Y) coming in ahead of the ~$1.34 consensus. Looking to 2027, management is targeting non-GAAP EPS growth similar to 2026 despite further investment in TM$ and operating expenses, implying ~$5.91 versus the ~$5.77 consensus, with formal guidance to come on the Q4 call.

Earnings Call Highlights

Morningstar Analyst Note

Etsy Update

For newer readers, here’s a brief overview of the key drivers behind our Etsy thesis, an asset-light online marketplace inflecting back to growth after digesting the pandemic pull-forward, while aggressively buying back stock along the way:

Company Overview

• Founded in 2005. Headquartered in Brooklyn, NY. The leading global online marketplace for unique, handmade, vintage, and craft items.
• Two-sided platform: ~5.8M active sellers and ~87.5M active buyers (vs. just 46M in 2019). 100M product listings, mostly non-SKU and artisanal/custom.
• $11.92B GMS in 2025 (74% U.S. buyers, 26% non-U.S.).
• Revenue $2.88B: marketplace ~69.6% (transaction/payment/listing fees), services ~30.4% (ads/shipping labels/other).
• Largest category Home & Living (38% of GMS). ~30% of GMS is made-to-order/custom. ~30% of GMS comes from gifting. 81% of buyers agree Etsy has items found nowhere else; 82% shop to support real people. Insulated from the cheaper/faster fulfillment “race to the bottom.”
• Shares down ~69% from the 2021 peak $297/share
• ~$550B TAM across relevant retail categories.

Management

• CEO Kruti Patel Goyal (effective start of 2026).
• Spent 15+ years at Etsy; former CEO of Depop (GMS/buyer base nearly doubled); most recently President & Chief Growth Officer.
• Josh Silverman (CEO since 2017) becomes Executive Chair through the end of 2026 for a smooth transition.
• CFO Lanny Baker departing March 1, 2027, staying on as an advisor through July 1, 2027; executive search firm retained for his successor.

Returning to Growth

• Etsy marketplace GMS +8.8% Y/Y to $2.65B in Q3 2026 (+9.1% currency neutral), the fourth consecutive quarter of Y/Y growth. Ex-FX, growth accelerated ~190 bps from Q2, the sixth consecutive quarter of sequential improvement, with the growth rate up more than 11 percentage points from the -2.4% posted a year ago.
• Growth broad-based across U.S. and non-U.S. buyers and all U.S. household income cohorts, with internal initiatives playing a larger role as external tailwinds (FX, tariff-driven listing prices, easy comps) fade. Personalization alone contributed ~2 percentage points to annualized GMS growth by Q3.
• Active buyers returned to Y/Y growth for the first time in two years, rising +1.0% to 87.5M (+540K sequentially), with gross buyer additions (new + reactivated) of 12.1M (+6.2% Y/Y; new buyers 5.0M +4.8%, reactivated 7.1M +7.2%).
• Repeat buyers 34.7M and habitual buyers 6.0M each grew sequentially for the second straight quarter, with TTM retention among existing buyers beginning to improve.
• TTM GMS per active buyer reached $126 (+3.9% Y/Y, +1.4% Q/Q), the third consecutive quarter of growth, with AOV the largest contributor as search surfaces higher-quality items; frequency remains modestly down Y/Y.
• Active sellers grew +6.5% Y/Y to 5.8M, the fastest pace in two years, with seller retention at its highest level since 2021 and GMS per seller accelerating.
• FY2026 GMS growth now guided to ~7% (raised from mid-single digits), representing a >15 pp swing off the high-single-digit declines of early 2025.
• Backdoor play on housing recovery (>38% of sales from Home & Living).
• NRF forecasts November and December retail sales up 4.2% Y/Y to $1.013T, the fastest growth since 2021 (+12.6%); compares with 2025 holiday sales up 3.1% to $972B

App, Personalization + Marketing

• App GMS share held at ~47% in Q3 2026, stable with 1H26 levels.
• App GMS grew +10.4% Y/Y (vs +12.5% in Q2), with personalization learnings from the app now being extended across web and to signed-out users.
• App drives 5x more visits, 3x more pages per visit, and 1.5x higher conversion, with ~40% higher LTV than non-app users.
• Non-app GMS more than doubled its growth rate to +7.5% Y/Y (vs +3.4% in Q2), a third consecutive quarter of growth.
• Reactivated nearly 30M lapsed buyers in 2025 (+4% Y/Y), with >100M in the lapsed pool. Reactivated buyers have 40% higher first-year lifetime value than new buyers.
• Personalized marketing: gone from <25% personalized notifications to >75%. Richer buyer profiles now power personalized feeds, recommendations, and owned marketing for four out of five active buyers, deepening with engagement and applying across feed, search, and marketing.
• Reaching younger buyers through Creator Collective, an Olivia Rodrigo partnership, and a shift into social and streaming. ~Half of TikTok impressions now reach 18 to 29 year olds, a channel Etsy barely spent in six months ago, with the Daisy Chain Fields/Olivia Rodrigo activation (26M social impressions, 10M+ views) Etsy’s top-performing press campaign ever.

Depop Sale

• Sold Depop to eBay (~$1.2B headline). Sale completed July 30, 2026, bringing $1.4B of cash into Etsy (the step-up above the headline reflects purchase-price adjustments recovering pre-close growth investments). Etsy booked an $839.7M gain on the sale in Q3.
• Acquired in 2021 for $1.63B (~23x sales); a $1.05B impairment in 2022 confirmed the overpay.
• Depop generated $1.1B GMS in 2025 (+36.3% Y/Y) and $187M revenue, but carried a lower take rate (-80 bps drag) and negative adjusted EBITDA margins (-350 bps drag).
• Sale proceeds represent ~17% of total company market cap for a business that was only 9% of GMS. Proceeds directed to share buybacks, with management seeing no better use inside the business today.
• Also sold Reverb (June 2025) and Elo7 (July 2023). Simplifies the portfolio, sharpens focus, and removes the margin drag.

Take Rate + Margin Expansion

• Take rate: 26.2% in Q3 2026 (+50 bps Y/Y), entirely organic now that the Reverb divestiture is lapped, led by Etsy Ads (better matching, ranking, and budget pacing) and to a lesser extent Offsite Ads. Only a portion of sellers’ ad budgets is deployed today.
• Q4 take rate guided to ~25.6%, with full year expected at ~25.8%.
• Q3 2026 adjusted EBITDA margin of 30.4% (+100 bps Y/Y), with adjusted EBITDA +14.6% Y/Y, outpacing revenue for the second consecutive quarter. G&A leveraged to 10.7% (vs 11.8%) and product development held flat at 16.0%, while marketing rose to 29.9% (vs 27.8%) as Etsy reinvested efficiency gains into growth at improving ROI.
• Gross margin in the low 70s (72.7% in Q3 vs 73.4% a year ago), with modest Y/Y compression tied to trust, safety, and refunds rather than compute. AI and hosting spend is tracking in line with plan, with offsets found elsewhere.
• Restructuring announced: cutting ~220 roles (~12% of headcount), concentrated in product and engineering, taking headcount to ~1,600. $33.9M in charges recognized in Q3, with the restructuring substantially complete.
• Management frames it as reducing overlap and reshaping the talent mix toward machine learning, not a structural lift to the long-term margin profile, with some savings reinvested into product, engineering, and customer operations talent.
• FY2026 adjusted EBITDA margin guidance raised to ~30% (from 29-30%), with Q4 also guided to ~30%.

AI Beneficiary

• Partnership with OpenAI: developed a dedicated Etsy App within ChatGPT (700M+ weekly users), aligned with OpenAI’s shift toward retailer-run apps for agentic shopping.
• Additional agentic shopping partnerships with Google (AI Mode/Gemini) and Microsoft (Copilot Checkout). Agentic traffic remains under 1% of total, but continues to show higher purchase intent, with shoppers often coming back to Etsy to complete purchases.
• Launched the beta of its “Gifting Assistant” in May 2026, Etsy’s first on-site shopping agent, now being extended to wedding shoppers. AI-powered seller assistant also in beta, offering each shop personalized insights.
• Management frames AI in three buckets: making Etsy more personal through discovery, matching, and personalization on-platform; making Etsy more discoverable off-platform through agentic partnerships; and learning how the next generation of shopping experiences evolves.
• The on-platform opportunity is where management sees the most value over time.

Cash Flow + Buybacks

• TTM operating cash flow of $598M (-13.5% Y/Y) and TTM FCF of $557M (-12.3% Y/Y), both including discontinued Depop outflows. On a continuing operations basis, Q3 2026 FCF reached $236M (+10.3% Y/Y), converting 112% of adjusted EBITDA.
• Buybacks: $395M repurchased in Q3 2026 (~5.2M shares), ~58% more than Q2.
• Shares outstanding down 27.8% over the past five years
• Remaining authorization of $2.2B, with management expecting to keep repurchasing at an accelerated rate.
• $2.5B in cash and investments at quarter-end after receiving the $1.4B of Depop proceeds, then paid $649M on October 1 to settle the remaining 2019 convertible notes.

Key Financials + Valuation

• ~$1.9B in cash and short/long-term investments. ~$2.3B in debt (pro forma for the October 1 note settlement).
• Trades ~13.3x forward earnings ($6.93 consensus 2027 EPS).
• 14.3% short interest, an attractive setup with re-rating potential as GMS growth accelerates and buybacks shrink the share count.

Q3 Commentary

Etsy shares have enjoyed a strong 2026, but heading into the third-quarter report, the debate around the stock had narrowed to a single question: was the recovery sustainable, or was it being propped up by temporary external tailwinds? GMS growth had accelerated steadily to 5.5% Y/Y in Q1 and 7.5% in Q2, a massive improvement from the high-single-digit declines Etsy posted through early 2025, when GMS bottomed with an 8.9% drop. Part of that acceleration, however, came with outside help, as inflation and tariffs lifted listing prices, currency moved in Etsy’s favor, and comps against depressed levels set a low bar. Q3 was the first quarter in which those tailwinds faded or reversed, with tougher comps, currency becoming a modest headwind, and the listing price increases now lapped. Not only did Etsy clear that higher bar, but it accelerated to its fastest GMS growth since Q4 2021.

GMS grew 8.8% Y/Y to $2.65B (+9.1% currency-neutral), exceeding the top end of guidance as currency-neutral growth accelerated by ~190 bps sequentially, bringing the rebound from the Q1 2025 trough to nearly 18 percentage points in just six quarters. Revenue grew 10.9% Y/Y to $692.5M, ahead of the $668.1M consensus, while adjusted EBITDA rose 14.6% to $210.4M (30.4% margin), well above the $195.9M consensus as operating leverage continued to drive profitability, with EBITDA growth outpacing revenue for a second straight quarter. Rather than easing off with tougher comps ahead, management raised full-year GMS growth guidance to ~7% from the mid-single digits and guided Q4 GMS to $3.46B to $3.52B, ahead of the $3.42B the Street was looking for.

With growth accelerating even as the external help fades, the quarter offered further proof that Etsy’s recovery is increasingly the product of self-help initiatives within management’s control. Credit goes to CEO Kruti Goyal, who in her first year at the helm has pressed all the right buttons alongside her management team to turn a stabilizing marketplace into a growing one.

The most important of those buttons has been personalization. With more than 100M listings, Etsy’s challenge has never been a lack of selection, but helping each shopper find exactly what they’re looking for. The app became the proving ground to test and refine that work, since every user there is signed in, giving Etsy more data on each shopper’s interests and preferences. The buyer profiles built there now power personalized feeds, recommendations, and marketing for four out of five active buyers. Management estimates that personalization alone added ~2 percentage points to annualized GMS growth by Q3, as better matches steer shoppers toward higher-quality items they are willing to pay more for.

The next step is bringing that playbook to the web, where the majority of Etsy’s GMS (~53%) still takes place. Early signs are encouraging, with non-app GMS more than doubling its growth rate to +7.5% Y/Y from +3.4% in Q2, closing much of the gap with the app’s +10.4%. With both channels now pulling in the same direction, the acceleration looks far more durable than growth carried by the app alone, while management says it has only begun to scratch the surface of what personalization can do.

Marketing is the second lever, with Etsy getting more out of every dollar it spends. While marketing expense rose to 29.9% of revenue from 27.8% a year ago as Etsy leaned in, GMS from marketing grew faster than the spend behind it, with efficiency gains across paid search and social stretching each dollar further. Etsy is putting those efficiency gains to work reaching a younger generation of shoppers through social media, scaling spend on TikTok and YouTube while testing Snapchat and Reddit. Half of its TikTok impressions now reach 18- to 29-year-olds on a platform where Etsy was barely spending six months ago, with the same channels proving just as effective at bringing lapsed buyers back. The Olivia Rodrigo partnership is a case in point, with her Etsy collection launch drawing more than 10M views as part of the company’s best-performing press campaign ever.

The best evidence that these self-help initiatives are working shows up on both sides of the marketplace. Better marketing is bringing more people through the door, with active buyers returning to Y/Y growth for the first time in two years (+1.0% to 87.5M).

Better personalization is getting them to spend more once they arrive, lifting TTM GMS per active buyer 3.9% to $126.

Sellers are following the demand, with active sellers growing 6.5% to 5.8M, their fastest pace in two years, as seller retention reached its highest level since 2021.

Purchase frequency remains the missing piece, still modestly down Y/Y, though repeat and habitual buyers grew sequentially for a second straight quarter, which management sees as early signs of buying habits forming.

More buyers attract more sellers, whose inventory in turn gives buyers more reasons to return, which is exactly the flywheel Etsy has spent the past two years trying to restart.

Every turn of that flywheel also throws off more cash, which is what ultimately turns a healthier marketplace into higher per-share value. Much like PayPal, Etsy is a cash machine with a rock-solid balance sheet, with the October 1 repayment of $649M in convertible notes bringing net debt to well under half a turn of adjusted EBITDA. Free cash flow from continuing operations grew 10.3% Y/Y to $236.4M in Q3, converting 112% of adjusted EBITDA, while the Depop sale added $1.4B to the war chest.

With that kind of cash generation and financial flexibility, management has made clear it sees no better use for that capital than aggressively repurchasing cheap shares. Etsy bought back ~$394.6M worth of stock in Q3, retiring ~5.2M shares and bringing the five-year reduction in shares outstanding to ~28%, with another $2.2B of authorization remaining (~27% of its $8.05B market cap).

So while shares have more than doubled off the ~$40 Liberation Day lows, the stock remains ~70% below its 2021 peak and trades at just 13.3x forward earnings, hardly a stretch for a business back in growth mode. With the business accelerating, self-help initiatives still in the early innings, and management aggressively shrinking the share count, we think Etsy’s comeback has a long way to run.

Q3 Earnings Breakdown

10 Key Points

1) Etsy delivered Q3 revenue of $692.5M (+10.9% Y/Y), ahead of consensus of $668.1M and accelerating from +9.3% Y/Y in Q2. Marketplace revenue increased +9.1% to $468.1M, while higher-margin services revenue grew +15.0% to $224.3M, with services continuing to outpace marketplace revenue on the strength of Etsy Ads.

2) Etsy marketplace GMS reached $2.65B (+8.8% Y/Y, +9.1% Y/Y currency-neutral), ahead of consensus of $2.57B and above prior guidance of $2.53B to $2.58B (+4% to +6% Y/Y). Excluding FX, growth accelerated ~190 bps from Q2, marking the sixth consecutive quarter of sequential improvement. Growth was broad-based across U.S. and non-U.S. buyers, as well as across all U.S. household income cohorts. The mix of that growth is also shifting toward Etsy’s own initiatives as earlier external tailwinds from FX, tariff-driven listing price increases, and easier comps fade. Management estimates that personalization alone contributed ~2 percentage points to annualized GMS growth by Q3, with improved search relevance and more efficient marketing adding to that internal momentum.

3) Growth broadened beyond the mobile app in Q3, with non-app GMS more than doubling its growth rate to +7.5% Y/Y (vs. +3.4% in Q2). App GMS grew +10.4% Y/Y (vs. +12.5% in Q2) and held steady at ~47% of total GMS. The app has served as Etsy’s testing ground for deeper personalization because every app user is signed in, giving Etsy better data to learn from. Management is now extending those learnings across the web and even to signed-out users. Richer buyer profiles now power personalized feeds, recommendations, and owned marketing for four out of five active buyers, with management seeing no significant technical hurdles to bringing the non-app experience up to the same standard.

4) Active buyers returned to Y/Y growth for the first time in two years, rising +1.0% to 87.5M, with ~540K added sequentially. Gross buyer additions grew +6.2% to 12.1M, with new buyers of 5.0M (+4.8% Y/Y) and reactivated buyers of 7.1M (+7.2% Y/Y). Retention among existing buyers also began to improve, with repeat buyers (34.7M) and habitual buyers (6.0M) growing sequentially for the second straight quarter. TTM GMS per active buyer reached $126 (+3.9% Y/Y, +1.4% Q/Q), marking the third consecutive quarter of growth. On the supply side, active sellers grew +6.5% Y/Y to 5.8M, the fastest pace in two years, with seller retention at its highest level since 2021 and GMS per seller accelerating.

5) Take rate expanded +50 bps Y/Y to 26.2%, ahead of prior guidance of ~26%. With the Reverb divestiture now fully lapped, the expansion came entirely from the core marketplace, led by Etsy Ads. Improvements to matching and ranking models increased ad relevance and lifted click-through and conversion rates, while better budget pacing directed seller spend toward the most valuable opportunities. Offsite Ads contributed to a lesser extent, benefiting from higher paid marketing spend.

6) Adjusted EBITDA came in at $210.4M (30.4% margin, +100 bps Y/Y), ahead of the $195.9M consensus and above the high end of prior guidance of 28% to 30%. EBITDA grew 14.6% Y/Y, outpacing revenue for the second consecutive quarter. The August restructuring supported the result, with product development holding flat at 16.0% of revenue. G&A also gained leverage, falling to 10.7% of revenue (vs. 11.8%). Marketing was the one line that deleveraged, rising to 29.9% of revenue (vs. 27.8%) as management reinvested efficiency gains from earlier in the year to drive profitable GMS growth.

7) Marketing remains one of Etsy’s most effective growth levers, with GMS from marketing growing faster than spend and ROI improving meaningfully Y/Y. Better segmentation of product listing ad feeds strengthened paid search, with Etsy seeing Google cost-per-click decline at a time when much of the industry is seeing it rise. Paid social is scaling at attractive returns on TikTok and YouTube, with ~half of TikTok impressions reaching 18- to 29-year-olds, a channel where Etsy barely spent six months ago. Brand work centered on human connection is also landing, with the Daisy Chain Fields festival activation and Olivia Rodrigo collection launch generating 26M social impressions and 10M+ views, making it Etsy’s top-performing press campaign ever.

8) Etsy is positioning AI as a tool to strengthen its differentiation, with management viewing its 100M+ listings of human-made, one-of-a-kind items as increasingly valuable as AI makes mass-produced goods easier to replicate. During the quarter, Etsy expanded its on-site AI tools by extending the Gifting Assistant beta, its first shopping agent, to wedding shoppers, alongside an AI-powered seller assistant that offers each shop personalized insights. Off-site, agentic partnerships with OpenAI, Google, and Microsoft remain early but continue to introduce high-intent shoppers who often return to Etsy to complete their purchases.

9) Etsy generated $236.4M of free cash flow from continuing operations in Q3 (+10.3% Y/Y), converting 112% of adjusted EBITDA into FCF. Capital return accelerated alongside it, with Etsy repurchasing $394.6M of stock (~5.2M shares) during the quarter, up ~58% from Q2’s $250M. Management expects to continue repurchasing shares at an accelerated rate, with $2.2B of authorization remaining, building on a ~28% reduction in shares outstanding over the past five years. Etsy ended the quarter with $2.5B in cash and investments, boosted by the Depop proceeds, before paying $648.6M on October 1 to settle the remaining 2019 notes and reduce total debt.

10) Management guided Q4 2026 Etsy marketplace GMS to $3.46B to $3.52B (+5% to +7% Y/Y), ahead of consensus of $3.42B, with a take rate of ~25.6% and an adjusted EBITDA margin of ~30%. That outlook holds despite FX turning into a modest headwind and prior-year comparisons becoming less favorable. For the full year, GMS growth is now expected at ~7%, up from prior guidance of mid-single-digit growth, alongside a take rate of ~25.8% and an adjusted EBITDA margin of ~30% (vs. 29% to 30% previously).

Earnings Call Highlights

General Market

The CNN “Fear and Greed Index” ticked up to 35 this week from 28 last week. You can learn how this indicator is calculated and how it works here: (Video Explanation)

The NAAIM (National Association of Active Investment Managers Index) (Video Explanation) ticked up to 87.69% equity exposure this week from 74.53% last week.

Our podcast|videocast will be out sometime today. We have a lot of great data to cover this week.  Each week, we have a segment called “Ask Me Anything (AMA)” where we answer questions sent in by our audience. If you have a question for this week’s episode, please send it in at the contact form here.

Larger accounts $5–10M+ can access bespoke service anytime here.

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CBOE Index Put/Call Ratio

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The column under the date 10/28/2026 has a letter that represents the movement in 2026 earnings estimates since the most recent print (8/29/2026). “U” means 2026 estimates are UP in the last 60 days. “D” means 2026 estimates are DOWN in the last 60 days. “S” means 2026 estimates have remained the SAME in the last 60 days. The column entitled “1yr Target Est” is the Wall Street consensus 12 month price target for each stock.

What this table is telling us is that estimates are DOWN. More estimates came DOWN for 2026 in the past 60 days than came UP – The Up:Down ratio was 11:13. The rest remained the same.

The cumulative 2026 earnings power of these 30 stocks was revised UP by +0.93% in the past 60 days. 2027 estimates were DOWN -0.50%.

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The column under the date 10/28/2026 has a letter that represents the movement in 2026 earnings estimates since the most recent print (8/29/2026). “U” means 2026 estimates are UP in the last 60 days. “D” means 2026 estimates are DOWN in the last 60 days. “S” means 2026 estimates have remained the SAME in the last 60 days. The column entitled “1yr Target Est” is the Wall Street consensus 12 month price target for each stock.

What this table is telling us is that estimates are UP. More estimates came UP for 2026 in the past 60 days than went DOWN – The Up:Down ratio was 15:10. The rest remained the same.

The cumulative 2026 earnings power of these 30 stocks was revised UP by +1.66% in the past 60 days. 2027 estimates were UP +1.74%.

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S&P Small Cap Stocks Above 200 Day Moving Average

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NYSE – Moving Balance Indicator

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Thanks to Reuters for including me in their article on Anthropic’s IPO filing. You can find it here:

Click Here to View The Full Reuters Article

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Watch in HD Directly on Fox Business

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Nasdaq Moving Balance Indicator

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S&P Technology Stocks Above 200-EMA

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Article referenced in VideoCast above:

“The Sky Isn’t Falling” Stock Market (and Sentiment Results)…

Key Takeaways – Episode 366

A detailed summary of this week’s videocast with Tom Hayes, covering the portfolio walkthrough, stock ideas, positioning, and market sentiment.

Executive summary

Semiconductors and memory snapped an eight-session losing streak, their longest since 2010, with the sell side rushing to defend the group (JPMorgan upgraded Intel with an $85 target, below the stock’s market price; Goldman upgraded CoreWeave). Tom treated the bounce as a normal, historically typical reflex rather than a reason to chase: all six prior eight-day losing streaks in the semiconductor index were followed by a bounce in the next two sessions, but CoreWeave’s credit-default-swap spread near 1,100 basis points, a Gartner estimate that 80% of Neocloud providers won’t survive past 2030, and China’s CXMT guiding sequential memory-price growth down from 95% to 15% all point to the same credit and demand questions that triggered the selloff in the first place.

His core thesis is a rotation already underway: for the first time since 2022, earnings growth across the other 493 S&P components is set to exceed the Magnificent 7, and consumer staples outperformed tech by nearly 14% last week, a gap seen only three times since 2000. Tom expects the AI-beneficiary trade (natural gas, industrials, defensives, small caps) to keep working over the next 12 months even if the AI-cost-center trade (the capex spenders and their financing) takes a breather, and he laid the case out for Joel Elconin on the Stock Trader Network’s Pre-Market Prep, pitching Baxter International, Pfizer, VF Corp, and Diageo alongside the rotation thesis.

On the portfolio, Tom put new money into Cooper Standard this week for the first time since the stock traded in the low teens, continued adding to Alibaba below $110, and said a resolved bank-covenant issue has let Densply Sirona become a large position. He also published a full update on Crown Castle, framing SpaceX’s $8 billion purchase of nationwide spectrum as confirmation that cell towers remain essential to any terrestrial wireless build-out, satellite included.

“We’re not interested in picking up nickels in front of steamrollers.”

Tom Hayes, on Avoiding The Crowded Ai Trade

Market sentiment and macro view

Semiconductors bounce after an eight-session rout

• The semiconductor index fell for eight straight sessions, its longest losing streak since 2010; in all six prior eight-day losing streaks, the index bounced over the following two sessions, which Tom expects to repeat, without being an aggressive buyer into it.
• JPMorgan upgraded Intel but kept its price target at $85, below the stock’s market price, which Tom calls “the least bullish upgrade” possible; Goldman upgraded CoreWeave, which rallied ~6% after falling ~12% on Friday.
• CoreWeave’s credit-default-swap spread sits near 1,100 basis points and Oracle’s CDS is also elevated; Tom reads both as signs the market and debt issuance depend on these stock prices holding up to protect year-end bonuses and planned IPOs.
• China’s CXMT, now bringing new memory supply to market, guided sequential price growth down from 95% at the midpoint to 15%, sending the stock down ~8% overnight even as Micron and SanDisk rallied on sell-side defense of the group.
• Tom’s framework: great theme does not mean great entry point after a stock has run 5–10x in a short period; he’d rather own the AI beneficiaries (names with free cash flow not sunk into capex) than the capex spenders themselves.

AI credit and demand warning signs

• Gartner estimates more than 80% of Neocloud providers won’t exist as independent businesses past 2030, because data-center owners need $8.5 trillion of cumulative revenue through 2030 against clients’ combined free-cash-flow capacity of only $3.6 trillion.
• Hyperscalers are projected to run roughly negative $100 billion of free cash flow over the next 12 months, leaving them dependent on continued ability to raise debt in public markets; Tom says the market is growing skeptical that can persist, and equity issuance would be the fallback if debt markets balk.
• Anthropic’s first-half income statement shows a net loss of ~$80 billion on ~$16 billion of revenue; Tom calls it a legitimate growth story but notes the public market is now getting a late, expensive taste of growth largely already priced into the private market.
• A Financial Times piece Tom cited argues AI compute demand is price-sensitive rather than unlimited, pointing to slowing corporate token spending (per Ramp data) and hyperscaler return on invested capital falling from a 38% peak in 2021 to below 20% today.
• Put skew (the cost to insure a 10–12% S&P correction) has spiked to a level Tom associates with smart money buying downside protection ahead of time, rather than retail panic-buying puts after a selloff has already started; he calls this a reason for caution on the AI trade specifically, not the broader market.
• HSBC called CoreWeave’s earnings estimates “wildly too optimistic,” and SpaceX’s bonds stayed weak even after what the company billed as a blowout earnings report, which Tom reads as the bond market, historically the smarter market, not buying the rally.

The great rotation: the other 493 catching the Mag 7

• Starting next quarter, S&P earnings growth for the 493 non-Magnificent-7 components is expected to run meaningfully ahead of the Magnificent 7 (30% versus 23%) for the first time since 2022, which Tom expects the market to increasingly reward through 2027.
• Consumer staples outperformed tech by nearly 14% last week; XLP has beaten XLK by that margin on only three prior occasions since 2000 (the March 2000 NASDAQ top, July 2022 near the bear-market lows, and October 2000 early in the dot-com bear market), with the share of staples trading above their 50-day moving average spiking from under 10% to over 67% in a few weeks.
• Healthcare’s weight relative to the S&P is back to levels last seen at the 2000 tech peak, and consumer discretionary has seen record outflows this year, both of which Tom treats as contrarian setups rather than reasons for caution.
• Margin debt expansion versus contraction is at a level not seen since 2021, and before that 2007 and 2000, which Tom flags as a crowding signal in the AI trade specifically rather than a call that a broad top is in.

Rates, the Fed, and the midterms

• Odds of an October Fed hike fell from ~40% to ~18% intraday; Tom still assigns ~75% odds to a December hike and says the market’s focus should be the rate of change in the 10-year yield, which has slowed, more than whether one more hike happens.
• The curve came within ~27–28 basis points of a 2-year/10-year inversion around the September hike; Tom says an inversion would typically be followed by a recession 12–24 months later (with a further rally in the interim), so he’s watching December’s outcome closely even though it is not his base case.
• Prediction markets now favor a Democratic sweep of Congress at ~63% odds, versus an ~80% Republican-sweep edge before the Iran war; Tom reads either a divided Congress or a Democratic one against a Republican president as fiscally restraining and a net positive for yields and stocks via gridlock.
• The French 10-year yield hit its highest level since 2008 near 5%, which Tom is watching as a European fiscal-strain signal distinct from the US, where yields have risen alongside continued growth rather than fiscal stress alone.
• Historically, the third year of a presidential cycle is strong, with typical weakness into the midterms followed by a year-end rally and follow-through into the first half of the following year, a pattern Tom expects to see again into 2027.

Long ideas — AI beneficiaries, defensives, and turnarounds bought against the semiconductor rollover

Names Tom walked through as current portfolio holdings or ideas he actively endorsed on the episode. Prices and levels are as cited on air.

Avoid, trim, or pass

Tom remains cautious on crowded or speculative names but did not call new shorts this week. Where a name is listed as a pass, he is declining to allocate capital rather than calling a short.

Portfolio moves

• Cooper Standard. New-money purchase this week, the first since the portfolio bought the stock at $5 in 2022; thesis more de-risked now, with hybrid-vehicle content providing added upside.
• Alibaba. Continued adding below $110 this week; hoping for an opportunity under $100.
• Densply Sirona. A bank-covenant issue that had pressured the stock was resolved via a revolver amendment; the position has grown into a large one for the portfolio.

Media appearances

Stock Trader Network — Pre-Market Prep, with Joel Elconin, Monday

• Defended the bullish rotation thesis, addressed AI credit-market risk, and discussed the Fed, all inside a 20-minute segment.
• Said the semiconductor bounce was a normal reflex after an eight-day losing streak but flagged Gartner’s Neocloud-survival estimate and elevated CoreWeave/Oracle CDS spreads as reasons not to chase it aggressively.
• Laid out the great-rotation thesis: for the first time since 2022, earnings growth in the other 493 S&P names is expected to exceed the Magnificent 7, which he expects to support a 490-led rally even if the index itself is more subdued.
• Pitched Baxter International and Pfizer as healthcare turnarounds trading at low multiples with earnings troughing this quarter, and VF Corp as a Vans-led turnaround with a near-term catalyst in the Vans x SZA shoe collaboration.
• Discussed the midterm setup (Democrats now favored to sweep Congress) and the Fed’s shrinking odds of an October hike as reasons fiscal restraint and a slower pace of rate increases should support both stocks and bonds into year-end.

• Thanked Jules Rimmer for a MarketWatch feature on the rotation from AI cost centers to AI beneficiaries.
• Thanked Sashwat Chawan for including him in a Reuters article.

What to watch

Opinion only for Informational/Educational purposes only. Not investment Advice. Not a solicitation to buy or sell securities. Read full terms at HedgeFundTips.com under Terms link.

The post Hedge Fund Tips with Tom Hayes – VideoCast – Episode 366 appeared first on Hedge Fund Tips.

Article referenced in Podcast above:

“The Sky Isn’t Falling” Stock Market (and Sentiment Results)…

Key Takeaways – Episode 366

A detailed summary of this week’s videocast with Tom Hayes, covering the portfolio walkthrough, stock ideas, positioning, and market sentiment.

Executive summary

Semiconductors and memory snapped an eight-session losing streak, their longest since 2010, with the sell side rushing to defend the group (JPMorgan upgraded Intel with an $85 target, below the stock’s market price; Goldman upgraded CoreWeave). Tom treated the bounce as a normal, historically typical reflex rather than a reason to chase: all six prior eight-day losing streaks in the semiconductor index were followed by a bounce in the next two sessions, but CoreWeave’s credit-default-swap spread near 1,100 basis points, a Gartner estimate that 80% of Neocloud providers won’t survive past 2030, and China’s CXMT guiding sequential memory-price growth down from 95% to 15% all point to the same credit and demand questions that triggered the selloff in the first place.

His core thesis is a rotation already underway: for the first time since 2022, earnings growth across the other 493 S&P components is set to exceed the Magnificent 7, and consumer staples outperformed tech by nearly 14% last week, a gap seen only three times since 2000. Tom expects the AI-beneficiary trade (natural gas, industrials, defensives, small caps) to keep working over the next 12 months even if the AI-cost-center trade (the capex spenders and their financing) takes a breather, and he laid the case out for Joel Elconin on the Stock Trader Network’s Pre-Market Prep, pitching Baxter International, Pfizer, VF Corp, and Diageo alongside the rotation thesis.

On the portfolio, Tom put new money into Cooper Standard this week for the first time since the stock traded in the low teens, continued adding to Alibaba below $110, and said a resolved bank-covenant issue has let Densply Sirona become a large position. He also published a full update on Crown Castle, framing SpaceX’s $8 billion purchase of nationwide spectrum as confirmation that cell towers remain essential to any terrestrial wireless build-out, satellite included.

“We’re not interested in picking up nickels in front of steamrollers.”

Tom Hayes, on Avoiding The Crowded Ai Trade

Market sentiment and macro view

Semiconductors bounce after an eight-session rout

• The semiconductor index fell for eight straight sessions, its longest losing streak since 2010; in all six prior eight-day losing streaks, the index bounced over the following two sessions, which Tom expects to repeat, without being an aggressive buyer into it.
• JPMorgan upgraded Intel but kept its price target at $85, below the stock’s market price, which Tom calls “the least bullish upgrade” possible; Goldman upgraded CoreWeave, which rallied ~6% after falling ~12% on Friday.
• CoreWeave’s credit-default-swap spread sits near 1,100 basis points and Oracle’s CDS is also elevated; Tom reads both as signs the market and debt issuance depend on these stock prices holding up to protect year-end bonuses and planned IPOs.
• China’s CXMT, now bringing new memory supply to market, guided sequential price growth down from 95% at the midpoint to 15%, sending the stock down ~8% overnight even as Micron and SanDisk rallied on sell-side defense of the group.
• Tom’s framework: great theme does not mean great entry point after a stock has run 5–10x in a short period; he’d rather own the AI beneficiaries (names with free cash flow not sunk into capex) than the capex spenders themselves.

AI credit and demand warning signs

• Gartner estimates more than 80% of Neocloud providers won’t exist as independent businesses past 2030, because data-center owners need $8.5 trillion of cumulative revenue through 2030 against clients’ combined free-cash-flow capacity of only $3.6 trillion.
• Hyperscalers are projected to run roughly negative $100 billion of free cash flow over the next 12 months, leaving them dependent on continued ability to raise debt in public markets; Tom says the market is growing skeptical that can persist, and equity issuance would be the fallback if debt markets balk.
• Anthropic’s first-half income statement shows a net loss of ~$80 billion on ~$16 billion of revenue; Tom calls it a legitimate growth story but notes the public market is now getting a late, expensive taste of growth largely already priced into the private market.
• A Financial Times piece Tom cited argues AI compute demand is price-sensitive rather than unlimited, pointing to slowing corporate token spending (per Ramp data) and hyperscaler return on invested capital falling from a 38% peak in 2021 to below 20% today.
• Put skew (the cost to insure a 10–12% S&P correction) has spiked to a level Tom associates with smart money buying downside protection ahead of time, rather than retail panic-buying puts after a selloff has already started; he calls this a reason for caution on the AI trade specifically, not the broader market.
• HSBC called CoreWeave’s earnings estimates “wildly too optimistic,” and SpaceX’s bonds stayed weak even after what the company billed as a blowout earnings report, which Tom reads as the bond market, historically the smarter market, not buying the rally.

The great rotation: the other 493 catching the Mag 7

• Starting next quarter, S&P earnings growth for the 493 non-Magnificent-7 components is expected to run meaningfully ahead of the Magnificent 7 (30% versus 23%) for the first time since 2022, which Tom expects the market to increasingly reward through 2027.
• Consumer staples outperformed tech by nearly 14% last week; XLP has beaten XLK by that margin on only three prior occasions since 2000 (the March 2000 NASDAQ top, July 2022 near the bear-market lows, and October 2000 early in the dot-com bear market), with the share of staples trading above their 50-day moving average spiking from under 10% to over 67% in a few weeks.
• Healthcare’s weight relative to the S&P is back to levels last seen at the 2000 tech peak, and consumer discretionary has seen record outflows this year, both of which Tom treats as contrarian setups rather than reasons for caution.
• Margin debt expansion versus contraction is at a level not seen since 2021, and before that 2007 and 2000, which Tom flags as a crowding signal in the AI trade specifically rather than a call that a broad top is in.

Rates, the Fed, and the midterms

• Odds of an October Fed hike fell from ~40% to ~18% intraday; Tom still assigns ~75% odds to a December hike and says the market’s focus should be the rate of change in the 10-year yield, which has slowed, more than whether one more hike happens.
• The curve came within ~27–28 basis points of a 2-year/10-year inversion around the September hike; Tom says an inversion would typically be followed by a recession 12–24 months later (with a further rally in the interim), so he’s watching December’s outcome closely even though it is not his base case.
• Prediction markets now favor a Democratic sweep of Congress at ~63% odds, versus an ~80% Republican-sweep edge before the Iran war; Tom reads either a divided Congress or a Democratic one against a Republican president as fiscally restraining and a net positive for yields and stocks via gridlock.
• The French 10-year yield hit its highest level since 2008 near 5%, which Tom is watching as a European fiscal-strain signal distinct from the US, where yields have risen alongside continued growth rather than fiscal stress alone.
• Historically, the third year of a presidential cycle is strong, with typical weakness into the midterms followed by a year-end rally and follow-through into the first half of the following year, a pattern Tom expects to see again into 2027.

Long ideas — AI beneficiaries, defensives, and turnarounds bought against the semiconductor rollover

Names Tom walked through as current portfolio holdings or ideas he actively endorsed on the episode. Prices and levels are as cited on air.

Avoid, trim, or pass

Tom remains cautious on crowded or speculative names but did not call new shorts this week. Where a name is listed as a pass, he is declining to allocate capital rather than calling a short.

Portfolio moves

• Cooper Standard. New-money purchase this week, the first since the portfolio bought the stock at $5 in 2022; thesis more de-risked now, with hybrid-vehicle content providing added upside.
• Alibaba. Continued adding below $110 this week; hoping for an opportunity under $100.
• Densply Sirona. A bank-covenant issue that had pressured the stock was resolved via a revolver amendment; the position has grown into a large one for the portfolio.

Media appearances

Stock Trader Network — Pre-Market Prep, with Joel Elconin, Monday

• Defended the bullish rotation thesis, addressed AI credit-market risk, and discussed the Fed, all inside a 20-minute segment.
• Said the semiconductor bounce was a normal reflex after an eight-day losing streak but flagged Gartner’s Neocloud-survival estimate and elevated CoreWeave/Oracle CDS spreads as reasons not to chase it aggressively.
• Laid out the great-rotation thesis: for the first time since 2022, earnings growth in the other 493 S&P names is expected to exceed the Magnificent 7, which he expects to support a 490-led rally even if the index itself is more subdued.
• Pitched Baxter International and Pfizer as healthcare turnarounds trading at low multiples with earnings troughing this quarter, and VF Corp as a Vans-led turnaround with a near-term catalyst in the Vans x SZA shoe collaboration.
• Discussed the midterm setup (Democrats now favored to sweep Congress) and the Fed’s shrinking odds of an October hike as reasons fiscal restraint and a slower pace of rate increases should support both stocks and bonds into year-end.

• Thanked Jules Rimmer for a MarketWatch feature on the rotation from AI cost centers to AI beneficiaries.
• Thanked Sashwat Chawan for including him in a Reuters article.

What to watch

Opinion only for Informational/Educational purposes only. Not investment Advice. Not a solicitation to buy or sell securities. Read full terms at HedgeFundTips.com under Terms link.

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Dow Percent on PMO Crossover BUY Signals

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Thanks to Lewis Krauskopf and Sudeshna Ghoshal for including me in their article on Reuters. You can find it here:

Click Here to View The Full Reuters Article

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Nasdaq Intermediate Term Volume Momentum Oscillator

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S&P 500 stocks above 200 Day Moving Average

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